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The CS ETF on MSCI Japan TRN Index ETF provides broad exposure to Japanese equity markets. Japan represents one of the largest, most developed, and richest economies in the world. To put it in perspective, Japan accounts for nearly 9% of global GDP. Roughly half of all Japanese international trade is conducted with its Pacific neighbors indicating its prominence as both regional supplier and end-consumer. Despite its regional economic importance, Japan has suffered stagnant economic growth in recent years. Looking ahead, Japan faces strong headwinds in the short-term stemming from its massive deficit and post-earthquake reconstruction. In the long-term, however, the outlook is slightly more positive as Japan is well-positioned to capitalise from burgeoning emerging market growth.
At the time of this writing, the fund's reference index has maintained moderate levels of correlation to the MSCI World (67%) and the STOXX Europe 600 (62%) over the past ten years. Moderate correlation levels signal that this ETF offers potential diversification benefits within an existing equity allocation. Be warned, however, correlation levels have risen in recent years and historical diversification benefits may not be as significant as they once were.
Given its narrow country focus, however, this ETF is best utilised as a tactical or satellite holding within an already well-diversified portfolio. However, before investing in this fund, we suggest investors check their portfolio’s for existing exposure to Japan. Japan, as one of the largest economies in the world, accounts for significant weightings in global equity funds and Asia-focused funds in particular. In a world fund, Japanese equities can comprise 15% to 25% of a portfolio, and in an Asia fund, Japan can comprise about half of a portfolio (using MSCI World, MSCI EAFE, and MSCI AC Asia as benchmarks). However, because Japan is so much more economically developed relative to its regional neighbors, many emerging market-oriented or growth Asia funds do not invest in Japanese stocks.
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