Dodging The Rising Sun

Published on Saturday, 23 June 2012 13:15 Written by Todd Shriber

Japan, the land of the rising sun, is still the world’s third-largest economy behind the U.S. and China. That statistic may surprise some given that Japan has battled myriad economic woes in recent years. Rising deficits, the loss of the AAA credit rating and demographic challenges (an aging population) have plagued Japanese equities.

In other words, Japan is a slow-growth economy in a region prized for its plethora of rapidly growing economic powers. So maybe it’s better to play Asia without Japan, an objective that can be accomplished with the WisdomTree Asia-Pacific ex-Japan Fund (NYSE: AXJL).

The WisdomTree Asia-Pacific ex-Japan Fund is six-years-old and has $80.6 million in assets under manageable. Beyond the superficial statistics, AXJL, which charges 0.48% per year, is an interesting mix of developed and emerging economies under the umbrella of one ETF. As Japan reminds investors, not all Asian economies have emerging status.

In fact, AXJL’s country weights position the fund nicely as a potential option for conservative investors looking for global exposure. Australia, Hong Kong an Singapore, all classified as developed markets, represent half of the ETF’s weight. Taiwan and South Korea, two emerging markets that really should have developed stats, comprise another 20% of AXJL’s weight.

The rest of AXJL’s country weight is divided among China, Malaysia, Thailand, Indonesia, India and the Philippines.

At the sector level, financials and telecommunications names dominate AXJL, combining for 45% of the funds. Materials and energy combine for another 22%.

Regarding performance, AXJL has been solid considering this year considering the tricky broad market in which it has had to operate. A year-to-date gain of 2.5% is decent for any ETF with global exposure. Beyond that, the fund has outpaced the iShares MSCI Japan Index Fund (NYSE: EWJ), the iShares MSCI All Country Asia ex Japan Small Cap ETF (NASDAQ: AXJS) and the Vanguard MSCI Emeging Markets ETF (NYSE: VWO).

Still, AXJL is not without its red flags. Australia, the fund’s largest country weight, is heavily dependent on the strength of emerging Asian economies as destinations for its commodities exports. Those emerging Asian nations are largely dependent on the economic health of the U.S. and European Union because those are primary end markets for Asian exports.

In other words, AXJL is the epitome of a profit/peril ETF. It would be an ideal risk on fund, but the market is far removed from risk on status at the moment. Think AXJL as a "not now, maybe later" ETF.