- Vanguard is a pioneer in index investing, and created the first retail tracker fund
- This ETF offers exposure to a broad range of companies in Japan
- The fund’s low charge should help it track the FTSE Japan index closely
How it fits in a portfolio
An ETF is a basket of investments that often includes shares or bonds. They tend to track the performance of an index such as the FTSE Japan Index and trade on stock exchanges, like shares. This means their price fluctuates throughout the day.
The Vanguard FTSE Japan ETF offers a low-cost solution for tracking the performance of the FTSE Japan Index. The index offers exposure to a range of large and medium sized Japanese companies across a variety of sectors.
A passive 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 Japanese market could be used to diversify a portfolio that’s focused on the US and 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. 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 over 9 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 Japan ETF tracks the performance of the 509 companies as measured by the FTSE 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 index has a large amount invested in the industrials, consumer discretionary and technology sectors which make up 25.45%, 22.98% and 10.38% of the benchmark respectively.
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 help reduce the tracking difference 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 just over $8.1trn of assets globally as of October 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 (Environmental, 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 60 people, carries out most of the firm’s voting and engagement activity. Their 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. The Stewardship team also produces frequent insights on their engagement activity at both a corporate and governmental level.
Vanguard has recently left the Net Zero Asset Management initiative, a group of asset managers that have committed to achieving net zero carbon emissions by 2050. We view this as a disappointing backward step, but we’re encouraged that the company will continue to engage with companies on climate-related issues.
As the Vanguard FTSE Japan ETF tracks an index of Japanese companies, it does not specifically integrate ESG considerations into its investment process.
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 Japan ETF has tracked its index well since launch. It’s returned 90.59% versus the benchmark’s 99.62%* 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 Japan Index currently make up 19.81% 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 Japan Index has returned -4.76% to the end of November. Oil & Gas companies were the best performing during the year with the energy sector growing 22.38%. However, this sector only makes up around 0.77% of the total index, so has a very small impact on overall performance.
The biggest sector in the FTSE Japan index is industrials, which accounts for around 25% of the index and returned -4.62% over the same period.
Japan's economy has recently been struggling with continuing implications of a worldwide recession, China's deteriorating economy, a weak yen and rising import costs which has impacted both consumers and businesses.
Given Vanguard’s size, experience and expertise running index tracker funds, we expect the fund to continue to track the FTSE 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.
Annual percentage growth
| Nov 17 – Nov 18 | Nov 18 – Nov 19 | Nov 19 – Nov 20 | Nov 20 – Nov 21 | Nov 21 – Nov 22 | |
| Vanguard FTSE Japan ETF | -0.58% | 6.85% | 8.37% | 4.14% | -5.19 % |
| FTSE Japan TR GBP | -0.11% | 7.44% | 8.90% | 4.62% | -4.76% |
Past performance is not a guide to the future. Source: *Lipper IM to 30/11/2022. Figures to 30 November 2019 are the income units of the fund (but assuming any income is reinvested) and from 30 November 2020 to 30 November 2022 are the accumulation units. This is due to when the accumulation units were launched.