How to tap into powerful growth trends in Asia ex-Japan

What happened?

Exchange Traded Funds (ETFs) have grown in popularity amongst Singapore investors. 

I saw an article in the Business Times recently about how many investors are starting to look at ETFs for diversification. 

Indeed, the asset under management of ETFs in Singapore has grown over the years to reach S$11 billion as of 30 March 2024. 

Earlier, we shared that there were 7 newly listed ETFs in Singapore over the last 12 months. 

Of these ETFs, there was one particular ETF that generated significant investor interest from its launch. 

The iShares MSCI Asia ex Japan Climate Action ETF (stock code: ICM / ICU) had an initial asset under management (AUM) of US$426 million, representing the largest equity ETF launch on the Singapore Exchange (SGX). At total expense ratio of 0.18% it is also the cheapest Asia Ex Japan market ETF in the world.

This comes at a time when there is greater focus amongst investors for action to address climate change and growing demand for low-cost vehicle.

With 60% of the world’s population – over 4.5 billion people – living in Asia, the rapid rise of the middle class is a powerful engine for long-term growth.

Let us find out more about the iShares MSCI Asia ex Japan Climate Action ETF and how it allows us to gain exposure to Asian companies leading the transition to a low-carbon economy.

What is the iShares MSCI Asia ex Japan Climate Action ETF?

The iShares MSCI Asia ex Japan Climate Action ETF seeks to track the MSCI AC Asia ex Japan Climate Action Index, an index that represents the performance of companies leading their sectors in terms of climate change transition positioning and practices.

The index incorporates MSCI's climate change criteria to select companies from its broad Asia ex Japan index. 

It first excludes companies involved in controversial activities like controversial weapons, tobacco, thermal coal mining and oil sands extraction.

The remaining companies are then scored based on their emissions intensity, emission reduction targets, climate risk management practices, and revenues from products/services that facilitate the low-carbon transition. 

From each sector, the top 50% of companies with the highest climate scores are selected for inclusion in the Climate Action index, weighted by their respective market capitalization.

This proprietary methodology results in the ETF holding a portfolio of over 600 large and mid-cap companies from developed and emerging Asian markets like China, India, Taiwan, South Korea and Singapore that may be better positioned for the climate transition.

What are the key constituents of the iShares MSCI Asia ex Japan Climate Action ETF?

Across geographies, China is the largest weighting in the MSCI Asia ex Japan Climate Action ETF, followed by India, Taiwan and South Korea.

The top 10 holdings in the underlying iShares MSCI Asia ex Japan Climate Action ETF include well-known Asian titans like Taiwan Semiconductor Manufacturing, Tencent, Alibaba, Meituan, and DBS as of 10 May 2024.

Overall, these top 10 names represent around 29% of the iShares MSCI Asia ex Japan Climate Action ETF, tilting towards established businesses that may have more resources to drive emissions reductions and green initiatives.

The ETF has 4.32% of its holdings in Singapore as of 10 May 2024. 

DBS Group Holdings is a relatively prominent holding in the iShares MSCI Asia ex Japan Climate Action ETF with a 1.37% weight.

What we noticed is that it has a higher weighting in the iShares MSCI Asia ex Japan Climate Action ETF compared to the iShares MSCI All Country Asia ex Japan ETF, likely due to DBS' climate initiatives. 

According to its 2022 sustainability report, DBS committed S$61 billion in sustainable financing from 2018-2022 and helped raise S$24 billion in ESG bonds.

As of 10 May 2024, there are 14 stocks listed on the SGX in the ETF, including UOB, Singtel, CapitaLand Integrated Commercial Trust, and Singapore Airlines.

Why consider the iShares MSCI Asia ex Japan Climate Action ETF?

#1 – Building a portfolio building block for Asian ex Japan exposure

Growth in Asia ex-Japan is expected to outpace the global economy in the coming years.

According to projections by the International Monetary Fund (IMF), emerging and developing Asia is expected to expand at 4.2% in 2024, exceeding the global growth of 3.2%.

In particular, India’s GDP is expected to expand by 6.8% in 2024, continuing the strong momentum in 2023.

China’s growth is also expected to be stable at 4.6% in 2024, as the government takes steps to provide targeted support towards specific sectors. 

The iShares MSCI Asia ex Japan Climate Action ETF hence offers investors exposure to growth in the Asia ex-Japan region, including harder to access markets such as Taiwan and South-Korea which house market leaders such as TSMC and Samsung.

#2 – Focus on current climate metrics 

The green energy transition remains a key global focus, amplified by the energy shocks from Russia's invasion of Ukraine that highlighted the world's dependence on fossil fuels.

According to Wood Mackenzie, Asia Pacific is expected to be the global leader for energy transition over the coming decades.

The ETF allows access to companies that may be better positioned to manage climate risks and the transition to a low-carbon future across key Asian markets.

Investing in an Asia ex-Japan climate ETF allows investors to capitalise on this transformative opportunity in the world's most populous and fastest-growing region. 

#3 – Low cost

The iShares MSCI Asia ex Japan Climate Action ETF has an expense ratio of just 0.18%, representing one of the lowest expense ratio amongst ETFs trading on the SGX. 

The expense ratio of iShares MSCI Asia ex Japan Climate Action ETF is lower than the 

Expense ratio on the iShares MSCI All Country Asia ex Japan ETF, which has an expense ratio of 0.7%.

This allows investors a low-cost way for investors to align investments with environmental objectives while maintaining broad Asian equity exposure.

While the ETF has just been launched, we can compare the performance of its underlying MSCI Climate Action index against the broad MSCI AC Asia ex Japan index year-to-date to gauge the potential performance impact.

Over the past 3 months, the iShares MSCI Asia ex Japan Climate Action ETF has performed well inline with the iShares MSCI All Country Asia ex Japan ETF, with both ETFs returning 8.5% over the time period of 12 Feb to 12 May 2024.

What are the risks of the iShares MSCI Asia ex Japan Climate Action ETF?

#1 – Market risks 

While many Asian economies are fast-growing, they can also be volatile. 

Rapid changes in economic conditions, such as sudden inflation spikes, currency devaluation, or economic slowdowns, can adversely affect investment returns.

For example, if China’s economy were to experience a significant slowdown, this may lead to continued weakness in the performance of Chinese stocks, as well as the Asia ex Japan stock market.  

#2 – Currency risks

For investors who are familiar with investing in the Singapore market, investing in an ETF with exposure to stocks listed outside of Singapore introduces exposure to currency risk.

For example, if the US keeps interest rates higher for longer, this may lead to a further strengthening of the US dollar versus currencies in Asia, particularly the currencies of emerging economies. 

This may then lead to a potential erosion of the US dollar or Singapore dollar returns of the ETF independent on the underlying stock’s performance. 

What would Beansprout do?

If our portfolios are significantly tilted towards US and Singapore stocks, we would consider diversifying by having some exposure to stocks in Asia.

After all, Asia’s growth is expected to remain exceed global growth this year, led by the robust performance of India and some stabilisation in China. 

The iShares MSCI Asia ex Japan Climate Action ETF allows investors a low-cost way to gain access to Asia ex-Japan stock markets including harder to access markets such as Taiwan and South Korea, while ensuring that the companies held are leading their sectors in terms of climate change transition positioning and practices. 

If you wish to invest in the ETF, you can do so via your regular local stock brokers, just like how you go about buying regular stocks for your portfolio. 

The ETF is also available in both SGD and USD share classes. The SGD Counter Stock Code is ICM and the USD Counter Stock Code is ICU. 

The Singapore dollar version of the ETF is priced at S$1.462 per share as of 3 June 2024. With a minimum lot size of 1, this would mean that you would be able to access the iShares MSCI Asia ex Japan Climate Action ETF for as little as S$1.50, excluding brokerage fees and other exchange fees. 

FSMOne has also recently added its SGD counter ICM to their regular savings plan. 

The iShares MSCI Asia ex Japan Climate Action ETF is classified as an Excluded Investment Product (EIP), which means there are no additional requirements for investors to meet to invest in it. 

You can learn more about the iShares MSCI Asia ex Japan Climate Action ETF here. 

To find out more about ETFs listed on the SGX, check out the SGX ETF screener page.

Disclaimer

Any information provided in this article is meant purely for informational and investor education purposes and should not be relied upon as financial or investment advice, or advice on corporate finance.

This article is not and does not constitute or form part of any offer, recommendation, invitation or solicitation to purchase any financial product or subscribe or enter any transaction. This article also does not take into account your personal circumstances, e.g. investment objectives, financial situation or particular needs and shall not constitute financial advice. You should consult your own independent financial, accounting, tax, legal or other competent professional advisors. 

The information provided in this article are on an “as is” and “as available” basis without warranty of any kind, whether express or implied. Beansprout does not recommend any particular course of action in relation to any investment product or class of investment products. No information is presented with the intention to induce any person to buy, sell, or hold a particular investment product or class of investment products.