iShares Asia 50 ETF: A Mixed Bag

ETFS

The Asia-Pacific region enjoys stability as a whole, and broad and multiple forms of regional cooperation has produced market results. – Wu Bangguo

The iShares Asia 50 ETF (NASDAQ:AIA) enables prospective investors to dabble with 50 of the largest Asian stocks. In this article, I will highlight some of the good and bad aspects of a potential investment in AIA.

Expensive access and patchy dividend record

Access to AIA doesn’t come cheap, with a sizeable MER (Management expense ratio) of 0.5%. There are other Asian-themed ETFs in this space that will give you access to the region in a more efficient manner; the likes of VPL, IPAC, BBAX all have expense ratios ranging from 0.08% to 0.19%.

The dividend angle of this fund too isn’t that great. Over the last five years, the dividends have only grown at 7% CAGR. Add to that, in H1-20, the dividend payout was cut by c.38% annually (AIA pays dividends on a semi-annual basis). Besides, as the ETF is currently trading at all-time highs, an entry at this point means your dividend yield is likely to be sub-optimal. Currently, you’ll only get a dividend yield of 1.6% which is quite some way off from AIA’s historical average of plus 2% yield.

Attractive regional exposure

Source: IMF

This is a good time to be exposed to Asia which is seemingly at the vanguard of the current economic recovery across the world. As per the IMF’s latest forecasts, average Asian GDP growth will decline by -2.2%, but is also poised to bounce back strongly in 2021 to 6.9%, well ahead of the previous 4.6%-5.8% GDP range of 2016-2019.

Source: AIA

I also like the specific regions that this ETF is predominantly oriented towards; c.82% of this ETF is exposed to export-themed Asian economies such as China, South Korea, and Taiwan whose growth prospects for the year ahead look more alluring than the rest of the global regions. These economies have managed to stay relatively resilient during the health pandemic of 2020 and have seen a quicker recovery on account of their export prowess.

Source: Bloomberg

If you’ve been following my commentary in The Lead-Lag Report, you’ll know that I’ve been highlighting the prospects of a more peaceful trade environment under the Biden government. However, crucially, earlier this month, some of these Asia-Pacific nations signed the RCEP (Regional Comprehensive Economic Partnership) free trade agreements which could reduce tariffs and promote free trade amongst the member nations.

Bloomberg Economics estimates that if 90% of these tariffs are eliminated, China’s and South Korea’s GDP could be boosted by 0.5% and 1.3% a year till 2030.

Not well diversified and top heavy from a holdings’ perspective

This ETF does suffer from some concentration issues. An investment in AIA will give you access to 50 stocks, but the lowest 40 weighted stocks only account for about a third of the total holdings, with the top-10 making up for more than 65%. In addition to that, the top-3 stocks are all overheated tech names – Tencent Holdings (OTCPK:TCEHY), Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM), and Samsung Electronics (OTC:SSNLF) jointly account for c.40% of the total holdings giving this a top-heavy feel. I can appreciate the long-term structural growth drivers of TCEHY such as an ever-growing user base and diversification from exposure to various regional markets, but in the near term, the company could be at risk of dealing with some anti-trust regulatory challenges which could limit further out-sized gains. TSM and SSNLF should continue to benefit from the broad secular tailwinds that have propelled the tech and chip export market but Q4 has traditionally been weak for the smartphone market. Besides, for SSNLF, the company will also likely see server demand in Q4 stay muted on account of inventory challenges at customers’ end. What could aid SSNLF (and potentially trouble TSM’s stock) is any positive news flow regarding the timeline of the manufacturing of 3nm chips; investors would be keen to see SSNLF make further progress to close the gap with TSM. Currently, TSM has a market share of more than 50% while SSNLF holds an 18% share. All in all, the prospects of the top 3 stocks look fairly mixed.

Source: AIA

Mixed sector exposure

Sector-wise as well, this ETF suffers from concentration issues with three sectors making up for c.78% of the total portfolio (Tech, Financials, and Communication Services). Those of you who subscribe to The Lead-Lag Report would note that I’ve been flagging the recent rotation away from tech and communication services as investors switch over to other cyclical sectors that offer more value. Tech and comm services have been key agents in driving the global markets this year but these sectors could be at risk of seeing further fund outflows in a more normalized economic environment. In fact, as I mentioned in this week’s edition of The Lead-Lag Report, the tech sector has just dropped below the crucial 20DMA (Moving average) for the first time in over a year. Conversely what could aid this ETF could be the strong financials sector exposure at 24%. Recent vaccine-related news and hopes of a stimulus package have raised the profile of financials, and given its relatively undervalued nature, it could be one of the key sector leaders in 2021.

Source: AIA

Conclusion

As mentioned recently in The Lead-Lag Report, a ratio measuring emerging markets to the S&P 500 has now returned to levels last seen before the pandemic. AIA gives you access to some of the most attractive emerging markets in the Asia-Pac region. Besides, there are also multiple tailwinds (such as superior growth prospects, resilient exports, favorable trade deals, currency tailwinds) that could continue to aid the prospects of these Asia-Pac EMs. Having said that, this ETF does suffer from various drawbacks such as significant concentration risk (both from a holdings and sector perspective), a relatively high expense ratio, and a patchy dividend record. Also consider that the ETF is at all-time highs, so if you enter now, your risk-reward will be sub-optimal and the dividend yield on offer too would be sub-standard relative to historical levels. Considering these mixed qualities, I am neutral on AIA.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This writing is for informational purposes only and Lead-Lag Publishing, LLC undertakes no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Lead-Lag Publishing, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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