An ETF Study

Usually I find something to write about in what I read or see on stock market television. Well not yesterday, so I thought I would do something I used to do more of which is to analyze an ETF. Hopefully this will be a little deeper than what you can find in most other places.

I write often about Australia and New Zealand as being an important theme (you can do a search at the top of the page for other articles). The ETF this article will focus on is iShares Asia Ex Japan (EPP).

The country make up of this ETF is 65% Australia, 20% Hong Kong and 10% Singapore. Neither iShares.com nor ETFconnect has more detail than this but there are a couple of New Zealand companies in there with a small weighting.

The sector breakdown is (although incomplete on both pages) is 25% in banks, 15% for real estate and materials, 6% for capital goods, 5% for utilities, 4% for transportation, telecom and insurance. 3% for other financials and food retailers.

EPP has a fairly tight correlation, most of the time, with the major Aussie banks while outperforming. EPP has a very high yield for an ETF at 3.3%.

In deciding how this ETF might fit in to your portfolio it makes sense to explore the weighting in financials. As I look at the paragraph above I count 31% that would be considered financial stocks. So it makes sense to see if EPP correlates with financial sector ETFs. The goal with this part of the exercise is to avoid overlap. In comparing EPP with IYF and XLF there lengthy periods of divergence such that I would say the correlation is not that tight. A big reason to have any interest in EPP at all is for the chance to own markets that have a low correlation to the US stock market and that seems to clearly be the case.

The sector make up of EPP kind of reminds iShares Dividend Select (DVY), a personal holding. I think the chart comparison is interesting. The correlation sort of ebbs and flows but is tighter than I expected. In the last six months there has been more of a divergence.

You can decide for yourself whether EPP makes sense for you but the point is the process of analysis. In trying to assemble a portfolio it makes sense to explore these types of relationships.

The analysis done here would come after you decide that want to invest in Australia.

There are several other ETFs, CEFs and ADRs to capture the Australian market.