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I’m actually quite bullish on Asia, and China in particular, which I’ve publicly argued may have bottomed economically, and which could be a surprise winner ahead. I know there are plenty of concerns with investing in China in particular, but there is a price for everything, and I do think it’s worth allocating broadly here. The question is how one who shares a similar view can position themselves for that part of the world’s growth. One good fund to consider is the iShares Asia 50 ETF (NASDAQ:AIA). This fund provides highly concentrated exposure to the 50 most prominent Asian equities.
A Look At The Holdings
Because this has only 50 holdings, it should make sense that it’s concentrated. A quarter of the fund is Taiwan Semiconductor (TSM). The 2nd and 3rd heaviest weighted positions are 10% each. So this is a very, very top-heavy fund.
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What do these companies do? Taiwan Semiconductor Manufacturing Company is a semiconductor manufacturer, supplying chips to Apple, Qualcomm, Nvidia, AMD, Broadcom, Xilinx, NXP, MediaTek and other leading manufacturers. Samsung Electronics is the Korean innovator of consumer electronics, semiconductors, and display technologies. Tencent Holdings is a Chinese conglomerate that services the booming tech sector. Focusing on technological and digital entertainment business models, Tencent has become a significant player in the fintech, gaming, social media, search engine and cloud infrastructure sectors. Alibaba Group Holding has been at the forefront of e-commerce and digital ecosystems. And AIA Group Ltd is the leading pan-Asian life insurance company offering a full portfolio of financial protection and wealth management solutions.
Solid and broad exposure, although yes very concentrated in the top 3.
Sector Breakdown
Given the huge Taiwan Semi exposure, it should come as no surprise that Tech makes up the largest allocation at nearly 50%.
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I’m nervous about tech in general here, so much of the fund’s performance will depend on if my worries are valid or unfounded. Asia’s booming financial services sector is the 2nd largest allocation, and includes banks, insurance companies and other finance-focused firms. And the Communications Services sector includes telecommunications, media, and entertainment.
As to regions, Thailand is the largest allocation, followed by China. Worth keeping in mind in case a conflict between the two actually takes place militarily.
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Peer Comparison
While the iShares Asia 50 ETF looks attractive, we still want to evaluate how it performs against its peers. One somewhat similar competitor is the Franklin FTSE Asia ex Japan ETF (FLAX). FLAX has China as its largest allocation at 28%, with India second at 23%. So different mix overall. When we compare the two to each other, we find that the price ratio on AIA is trending higher lately, but the two funds overall have performed somewhat in line with each other.
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Pros and Cons
On the positive side, AIA includes the region’s largest and most important enterprises from a wide spectrum of sectors spanning technology to consumer-led business across financial powerhouses. By buying this ETF, you indirectly benefit from the collective investments going into these enterprises. Overall, this diversification within Asia offers a strong potential return.
But with those pros come multiple layers of risk. Political and economic frailties, regulatory uncertainties, and geopolitical tensions – such as those of policy shifts affecting global supply chains – all present potentially debilitating threats to the fortunes of Asian equities. The region is also host to a business ecosystem built on global trading flows, greater than any other in the world. Alongside this, concentrated exposure to Chinese companies brings other more specific China-related risks stemming from the country’s evolving economic policies and regulatory environment, and its ongoing tensions with the US and other world powers. Again — I’m positive about China, but it’s still likely going to be challenging.
Conclusion
iShares Asia 50 ETF seems like a decent fund overall, though I do get nervous around the top 3 weightings. If you’re bullish on Asia and Tech, it’s worth allocating. I would prefer more pure play access to China and less Tech exposure overall, but for those investors where that isn’t a concern, I think it’s a decent fund overall and worth considering.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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