Vanguard FTSE Asia ex Japan Shares ETF is a sensible choice for Asian ex-Japan equities exposure. A diversified underlying portfolio that captures the opportunity set reasonably well, and an experienced team skilled at maintaining a low tracking error, underpins our continued conviction in the strategy.

The fund aims to track the FTSE Asia ex Japan, Australia, and New Zealand Index in Australian dollars. The opportunity set comprises large- and mid-cap stocks covering 10 Asian countries. With 2,023 companies as of May 2025, the FTSE index draws ahead of the category index (1,020 companies) from a stock-level diversification standpoint.

The makeup of the markets that are included in the index and its market-cap-weighted scheme skew the portfolio to China, representing around 33% as of May 2025. Other major country exposures include India, Taiwan, and South Korea, together representing around 50% exposure. Thus, emerging markets dominate the portfolio. This segment has typically been a fertile hunting ground for astute active managers, due to the perceived inefficiencies of the market, as indicated by the large dispersion of return outcomes.

The strategy reliably tracks the FTSE ex Japan, Australian, and New Zealand Index, giving broad Asian ex-Japan stock exposure. However, highly rated active managers have consistently demonstrated skill in navigating systematic and idiosyncratic risk factors, translating to strong risk-adjusted outcomes for investors.

Investment process

It is a free-float-adjusted, market-cap-weighted index. The index comprises large- and mid-cap stocks providing coverage of China, Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan, and Thailand. The strategy fully replicates the index but can employ a representative sampling approach if it becomes inefficient to fully replicate the index’s securities at any time.

A key objective of the fund is to achieve cost efficiencies in trading. The fund aims to add value by exploiting opportunities around index changes. Portfolio managers may trade one to two days before and after modifications to minimize market impact. Additionally, Vanguard engages in securities lending to add incremental value. Vanguard returns the entire securities-lending profit to the strategy, reducing tracking error resulting from fees. The process is conducted in a risk-aware manner, with the team requiring high-quality collateral over the value of the investment.

While holding a broad cross-section of stocks covering the Asia ex-Japan markets offers the benefit of diversification, several active managers have added value through stock selection in markets like Taiwan and India.

The FTSE Asia ex Japan, Australia, and New Zealand Index has approximately 2,000 constituents weighted by their free-float-adjusted market capitalization, with rebalancing occurring on a semiannual basis. While providing greater stock-level diversification compared with the Morningstar Category index, country allocation remains broadly consistent.

The most represented countries are China, India, and Taiwan at 33.2%, 22.2% and 19.7%, respectively, as of May 2025. Sector allocations are dominated by technology and financial stocks, each representing above 20%. The top 10 stocks account for 28.0% of the portfolio, with Taiwan Semiconductor Manufacturing, the largest individual position, at just under 10.0% as of month-end May 2025.

The FTSE and category index do not include Australia and New Zealand companies. However, the category average allocation to Australia and New Zealand is approximately 15%.

Subscribe to get Morningstar insights in your inbox