We think conservative investors can hold up to 10% of their portfolios in foreign stocks. One way to do that is by choosing exchange-traded funds (ETFs) with an overseas focus.
The best of those funds continue to offer low management fees and well-diversified, tax-efficient portfolios of high-quality stocks.
Together, these ETFs represent two of Asia’s wealthiest markets. While the rising trade dispute between China and the U.S. brings uncertainty, each fund has good long-term prospects. Right now we see one as a buy and the other as a hold.
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POWERSHARES CHINA SMALL CAP PORTFOLIO ETF (New York Exchange symbol HAO; buy or sell through brokers; www.invesco.com) changed its name from Guggenheim China Small Cap ETF in May 2018 when Invesco Ltd. bought Guggenheim’s ETF business.
This particular PowerShares ETF aims to track the AlphaShares China Small Cap Index. It’s made up of the 347 Chinese stocks that foreign investors are allowed to hold and that have market caps of less than $1.5 billion. The ETF has an MER of 0.75% and yields 3.2%.
Top holdings for this $94.3 millon fund are Zall Group (conglomerate), 1.6%; China First Capital, 1.3%; Momo Inc. (social media), 1.1%; Zijin Mining, 1.1%; Yanzhou Coal, 1.1%; Wuxi Biologics, 1.1%; Kingdee International Software, 1.1%; 51job (human resources), 1.0%; Genscript Biotech, 1.0%; and Jiayuan International (real estate), 1.0%.
China continues to work on reducing the high levels of consumer and business borrowing. It also continues to tighten environmental regulations. Both of these efforts will limit economic growth. Still, as the economy further matures and wages rise, domestic spending should increase.
U.S. threats of further tariffs should also spur the Chinese government to encourage domestic consumption. PowerShares China Small Cap Portfolio ETF is well-positioned to benefit from those trends.
Recommendation in Canadian Wealth Advisor: PowerShares China Small Cap Portfolio ETF is a hold for aggressive investors.
ETFs: A strong U.S. dollar remains a plus for Japanese exporters
ISHARES MSCI JAPAN INDEX FUND (New York Exchange symbol EWJ; buy or sell through brokers; us.ishares.com) is an ETF that tries to match the return of the Morgan Stanley Capital International (MSCI) Japan Index.
The fund’s top holdings include Toyota, 4.6%; Mitsubishi UFJ Financial, 2.4%; Softbank, 2.1%; Honda Motor, 1.6%; Sumitomo Mitsui Financial, 1.6%; Sony Corp., 1.6%; Keyence Corp. (sensors), 1.5%; Fanuc Corp. (conglomerate), 1.3%; and KDDI Corp. (telecom), 1.3%. The ETF’s MER is 0.49%.
In the long term, Japan faces a labour shortage as its population ages, and it remains closed to immigration. In the short term, the trade dispute between the U.S. and China—two of Japan’s biggest export markets—is a worry. As well, the country imports almost all of its oil, so this year’s rising prices have hurt the economy. A strong yen has also made its goods less attractive to overseas buyers.
Despite these challenges, the Japanese economy remains sound and corporate earnings keep rising. In addition, the U.S. dollar is also rebounding, which is a big plus for exporters.
Recommendation in Canadian Wealth Advisor: iShares MSCI Japan Index Fund is a buy.