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~ by Snehasish Chaudhuri, MBA (Finance)
The Vanguard FTSE Pacific ETF (NYSEARCA:VPL) is an exchange traded fund that invests in public equity markets of Asia-Pacific countries. Vanguard FTSE Pacific ETF fully replicates the composition of the FTSE Developed Asia Pacific All Cap Index. This index is a market-capitalization weighted index, and tracks the return of equity investments in the most prominent markets in the Asia-Pacific region. VPL’s portfolio is fully diversified and invests primarily in growth oriented sectors in three major economic regions – Japan, Australia and South Korea. The fund generates a low but decent yield, and double digit total returns over a longer time period. It is currently trading at a negligible premium.
VPL has a Sectorally Diversified But Geographically Concentrated Portfolio
Vanguard FTSE Pacific ETF has an expense ratio of 0.08 percent, and net asset value (NAV) of $64.32. The fund invests almost 90 percent of its $8.63 billion assets under management (AUM) in three countries – Japan, Australia and South Korea. VPL has been paying quarterly dividends for the past 10 years, and has generated a yield of 3.53 percent. Total return delivered during 2017 and 2021 was more than 10 percent. Almost 63 percent of the entire fund is invested only in four sectors – information & communication technology (ICT), financial, industrial and healthcare. These four sectors have the highest growth potential in the coming decades.
Vanguard FTSE Pacific ETF has investments in almost 2500 stocks, and a very small proportion of its assets are invested in a particular stock. Its top 25 investments comprise only 27 percent of its AUM, and mostly reputed brands in the Japanese market, such as Toyota Motor Corp. (TM), Sony Group Corp. (SONY), Keyence Corp. (OTCPK:KYCCF), Mitsubishi UFJ Financial Group Inc. (MUFG), Daiichi Sankyo Co. Ltd. (OTCPK:DSKYF) (OTCPK:DSNKY), Shin-Etsu Chemical Co. Ltd. (OTCPK:SHECY) (OTCPK:SHECF), Tokyo Electron Ltd. (OTCPK:TOELF) (OTCPK:TOELY), Hitachi Ltd. (OTCPK:HTHIY) (OTCPK:HTHIF), KDDI Corp. (OTCPK:KDDIY) (OTCPK:KDDIF), SoftBank Group Corp. (OTCPK:SFTBY) (OTCPK:SFTBF), Mitsui & Co. Ltd. (OTCPK:MITSY) (OTCPK:MITSF), Nintendo Co. Ltd. (OTCPK:NTDOY) (OTCPK:NTDOF), Recruit Holdings Co. Ltd. (OTCPK:RCRRF) (OTCPK:RCRUY), Takeda Pharmaceutical Co. Ltd. (BRANCH).
Majority of these stocks delivered negative or marginal growth during the past 6 months. This is not surprising because Japanese stocks are less volatile in nature, and are mostly in sync with the broader market. The S&P 500 index grew by only 1.29 percent during this period, while VPL’s market price grew by a little more than 3 percent. On the other hand, investments in other markets such as Samsung Electronics Co. Ltd. (OTCPK:SSNLF), BHP Group Ltd. (BHP), Commonwealth Bank of Australia (OTCPK:CBAUF), AIA Group Ltd. (OTCPK:AAGIY), CSL Ltd. (OTCPK:CSLLY), National Australia Bank Ltd. (OTCPK:NABZY), Westpac Banking Corp. (OTCPK:WEBNF), Australia and New Zealand Banking Group Ltd., Woodside Energy Group Ltd. (WDS), and DBS Group Holdings Ltd. (OTCPK:DBSDF), witnessed positive price growth during the past 6 months. Majority of these are financial institutions.
Risks & Challenges Associated with Portfolio of Vanguard FTSE Pacific ETF
Japan, Australia and South Korea, although they are established markets with high sovereign credit ratings, carry some demographic and economic risks. The Australian economy is heavily dependent upon extraction and export of natural resources, which is going to face a tough margin pressure due to increase in demand for alternative resources such as biofuel. The Korean economy is facing the challenges of global supply-chain disruptions, sustained high inflation and rapidly rising interest rates. Japan’s population is declining and debt to GDP is one of the highest in the world. The country also has a negative interest rate, which surely has a huge impact on returns of stocks listed in the Japanese stock market.
The Japanese Yen is also in a free-fall and is trading near 134 per dollar after starting 2022 at 115. Takeshi Tashiro of Peterson Institute for International Economics, in an article titled ‘Weak yen reveals Japan’s fundamental challenges’, published in ‘East Asia Forum’ mentioned that “In September 2022, the yen dropped to a 24-year low, leading the government to intervene to prop up the currency for the first time since 1998……Japan is widely regarded as the first modern example of secular stagnation as well as a testing ground for developing an escape strategy. After its ‘bubble’ economy burst, causing a financial crisis in the 1990s, Japan entered a period of low growth known as the ‘lost decades’ with GDP never reaching its potential.”
‘7 Factor Model for Evaluating Global Funds’ Suggests VPL to be Good Fund
Vanguard FTSE Pacific ETF is trading at a negligible discount to its NAV. The fund has been paying quarterly dividends for the past 10 years, and the annual average yield has been in the range of 2 to 4 percent. The yield is not quite high, but at the same time not negligible, too. Otherwise, this fund qualifies the minimum requirements with respect to AUM, stock price, and overall returns. The fund is highly diversified, has a low expense ratio, and invests in established companies in credible economies. The sovereign bond ratings of Japan, Australia, and South Korea are A+, AAA, and AA, respectively.
The portfolio of Vanguard FTSE Pacific ETF is well diversified over the various sectors, and its majority investments in four of the high potential sectors (ICT, financial, industrial, and healthcare) are expected to benefit this fund in the long run. If 90 percent of the funds are invested in the equity markets of Japan, Australia, and South Korea, we can be quite secure about the stability of these stocks. However, these markets are also at a significant risk of slowing down, which is a factor to be concerned about. I am thus cautiously optimistic about this fund to sustain the current level of total return. However, I don’t find any reason why this fund will not be able to sustain the current level of yield.
Editor’s Note: This article discusses one or more securities that do not trade on a major US exchange. Please be aware of the risks associated with these stocks.
