- Vanguard is a pioneer in index investing and launched its first ETF in 2001
- Invests a significant amount in countries like Australia, South Korea, and Hong Kong
- The ETF’s low charges should help it track the FTSE Developed Asia Pacific ex Japan index closely
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.
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 exchange traded 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. Given the regional exposure, this ETF could add diversification to the Asian portion of a global investment portfolio, alongside other funds focused on 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 over 90 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 in 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.
Geographically, Australia, South Korea and Hong Kong make up 45.0%, 29.9% and 15.7% of the fund respectively. The rest is invested in Singapore and New Zealand. Sector wise, financials, telecommunications and basic materials account for around half of the ETF.
Reducing costs is a key part of keeping the tracking difference between the fund and the benchmark to a minimum. In any exchange traded fund, factors like taxes, dealing commissions and spreads, and the cost of running the ETF 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. They 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 one of the largest asset managers in the world. They currently manage $7.7 trillion of assets globally and have over 20,000 employees as of April 2023. 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 criteria by tracking indices that tilt towards companies with positive ESG characteristics, and away from those that don’t.
Vanguard’s Investment Stewardship team 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 produces frequent insights on their engagement activity at both a corporate and governmental level. Investors can also access fund-by-fund proxy voting records, although voting rationales are not provided. That said, voting and engagement case studies can be found in the firm’s annual and semi-annual Investment Stewardship reports.
Vanguard courted controversy in 2022 when it left the Net Zero Asset Managers’ Initiative, a group of asset managers that have committed to achieving net zero carbon emissions by 2050. It claimed its decision would improve clarity for investors and allow it to speak independently. 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 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
Since launch in May 2013, the Vanguard FTSE Developed Asia Pacific ex Japan ETF has tracked the index well. Over this period, it’s returned 71.36% versus the benchmark return of 76.95%*. 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.
Over the past year (to end of July 2023) the FTSE developed Asia pacific ex Japan index returned 2.59%, lagging the wider the global stock market.
The largest sectors like financials, telecommunications and industrials returned -0.17%, -2.77% and 24.11%, respectively. Regionally, Korea did relatively well but with Australia marginally underperforming, its significant weighting in the portfolio held back performance.
Although the ETF invests in around 400 companies, the 10 biggest in the FTSE Developed Asia Pacific ex Japan index currently make up 34% 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.
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.
| July 18 – July 19 | July 19 – July 20 | July 20 – July 21 | July 21 – July 22 | July 22 – July 23 | |
| Vanguard FTSE Developed Asia Pacific ex Japan ETF | 6.25% | -9.04% | 27.57% | -4.10% | 2.29% |
| FTSE Developed Asia Pacific ex Japan | 6.61% | -8.83% | 28.00% | -3.89% | 2.59% |
Past performance is not a guide to the future. Source: *Lipper IM to 31/07/2023.
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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