Vanguard FTSE Developed Asia Pacific ex Japan ETF: September 2022 Update

How it fits in a portfolio

An ETF is a basket of investments that often includes company shares or bonds. They tend to track the performance of an index such as the FTSE Developed Asia Pacific ex Japan Index and trade on stock exchanges, like shares. This means their price fluctuates throughout the day.

FIND OUT MORE ABOUT ETFS

The Vanguard FTSE Developed Asia Pacific ex Japan ETF offers a low-cost option for tracking the performance of the FTSE Developed Asia Pacific ex Japan Index. The index offers exposure to a range of large and medium-sized companies across the Asia Pacific region, including Australia, South Korea, and Hong Kong, but excluding Japan.

An index fund is one of the simplest ways to invest and can be a low-cost starting point for an investment portfolio aiming to deliver long-term growth. ETFs that track the emerging markets could be used to diversify a long-term global investment portfolio, including those focused on other regions such as the UK, US or Europe.

Manager

Vanguard is a pioneer when it comes to passive investing, having created the first retail index fund over 45 years ago. It now runs some of the biggest index funds in the world. Given its size, it has a large investment team with the expertise and resources to help its funds track indices and markets as closely as possible, while having scale to keep costs down.

Vanguard ETFs are run by a large, global team of 80 people. They’re spread across three investment hubs around the world – the US, UK and Australia. This team-based approach means there’s no named manager on the fund. As a collective team, Vanguard has run this ETF for nearly 10 years.

Vanguard also has a trading analytics team, which is responsible for ensuring the ETFs buy and sell investments efficiently and at a competitive cost. This involves analysing data from different brokers and banks. Lower costs could help the ETF track its benchmark as closely as possible.

Process

This Vanguard FTSE Developed Asia Pacific ex Japan ETF tracks the performance of a range of companies as measured by the FTSE Developed Asia Pacific ex Japan Index. The ETF tracks the benchmark by investing in all the underlying companies of the index, and in line with each company’s index weight. This is known as full replication and can help the fund track the index closely.

The fund has a large amount invested in Australia, Korea and Hong Kong which make up 45.0%, 28.4% and 17.4% of the fund respectively. The rest is invested in Singapore and New Zealand. Technology, financials and basic materials sectors also make up a large part of the fund.

Reducing costs is a key part of keeping the tracking difference between the fund and the benchmark to a minimum. In any index tracker fund, factors like taxes, dealing commissions and spreads, and the cost of running the fund all drag on performance.

Vanguard will also lend some of the investments in the ETF to other providers in exchange for a fee, which can reduce the costs for investors, though this adds risk.

Vanguard will only lend securities to a limited number of approved dealers. They indemnify the fund against any loss from this process, meaning there should be no negative impact on investors.

Culture

Vanguard is currently the second largest asset manager in the world and runs £6.31 trillion of assets globally as of May 2022. The group aims to put the client at the forefront of everything it does, which drives its focus on quality, low-cost index products.

Jack Bogle founded Vanguard in 1975 and it’s owned by investors. This allows Vanguard to redirect its profits back to investors in the form of lower fees, instead of paying dividends to external shareholders. Bogle believed in creating products that simply track the performance of a market rather than taking a shot at picking individual stocks which may beat them.

The team running this ETF works closely with other equity research and risk departments across the business. They have daily and weekly meetings to discuss ongoing strategy which could add good support and challenge on how to run the fund effectively.

ESG Integration

Vanguard is predominantly a passive fund house. While it has offered exclusions-based passive funds for many years, it has lagged peers in offering passive funds that explicitly integrate ESG (Environment, Social and Governance) criteria by tracking indices that tilt towards companies with positive ESG characteristics, and away from those that don’t.

Vanguard’s Investment Stewardship team, which consists of over 35 people, carries out most of the firm’s voting and engagement activity. Its stewardship activity is grounded in the firm’s four principles of good governance: board composition and effectiveness, oversight of strategy and risk, executive compensation, and shareholder rights.

As the Vanguard FTSE Developed Asia Pacific ex Japan ETF tracks an index of companies, it does not specifically integrate ESG considerations into its investment process, and the fund therefore has the flexibility to invest in companies deemed to be sin stocks, such as weapons and alcohol producers.

Cost

The fund currently has an ongoing annual fund charge of 0.15%. There are no charges from HL to hold ETFs within the HL Fund and Share Account. The annual charge to hold ETFs in the HL ISA or SIPP is 0.45% (capped at £45 p.a. in the ISA and £200 in the SIPP). Ensuring a passive fund has a low charge is an important part of tracking the underlying index closely.

As ETFs trade like shares, both a buy and sell instruction will be subject to the HL share dealing charges within any Hargreaves Lansdown account.

Performance

The Vanguard FTSE Developed Asia Pacific ex Japan ETF has tracked its index well since launch. It’s returned 80.00% versus the benchmark’s 85.46%* over this time. As expected from a tracker fund, it’s fallen behind the benchmark over the long term because of the costs involved. However, the tools used by the managers have helped to keep performance as close to the index as possible. Past performance is not a guide to the future.

The 10 biggest companies in the FTSE Developed Asia Pacific ex Japan index currently make up 33.77% of the total index. How these companies perform will play a bigger part in the performance of the index and fund compared with some of the smaller holdings.

Over the last year, the FTSE Developed Asia Pacific ex Japan index returned -2.22% to the end of August 2022. Oil & Gas companies were the best performing during the year with the energy sector growing 47.75%. However, this sector only makes up around 3.80% of the total index.

Some of the largest Asia and Pacific markets like Australia and Korea have been impacted by persistent inflationary pressures. Central banks across the region are trying to tackle the problem by raising interest rates. In the meantime, the rising cost of food and other household goods is putting pressure on individuals and subsequently their spending power. Raising interest rates will also impact growth companies held in these markets, as they reduce the value of future cashflows. This will dampen the fund’s performance.

Asian stock markets have also faced a tougher time over the past year, partly as China has faced headwinds due to its Covid-induced lockdowns.

Given Vanguard’s size, experience and expertise running index tracker funds, we expect the fund to continue to track the FTSE Developed Asia Pacific ex Japan index well, though there are no guarantees on how it will perform. A glance at the five-year performance table below shows in some years the fund has tracked the index closer than others. Remember, past performance isn’t a guide to future returns, investors could get back less than they invest.

Past performance is not a guide to the future. Source: *Lipper IM to 31/08/2022. Figures to 31 August 2020 are the income units of the fund and from 31 August 2020 to 31 August 2022 are the accumulation units where income is reinvested. This is due to when the accumulation units were launched.

MORE ABOUT THE VANGUARD FTSE DEVELOPED ASIA PACIFIC EX JAPAN ETF INCLUDING CHARGES

VANGUARD FTSE DEVELOPED ASIA PACIFIC EX JAPAN ETF KEY INVESTOR INFORMATION

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