BBAX: Asia-Pacific Ex-Japan ETF Generating Decent Yield And Total Return

~ by Snehasish Chaudhuri, MBA (Finance)

JPMorgan BetaBuilders Developed Asia ex-Japan ETF (BATS:BBAX) is an exchange traded fund that invests in various equity markets of the Asia-Pacific region excluding the Japanese stock market. The fund has a fully diversified portfolio with special emphasis on growth and value stocks. Its portfolio is more inclined towards stocks of Australian companies, as almost 65 percent of its assets are invested there. A little over 31 percent of its NAV is invested in the equity markets of Hong Kong and Singapore. Not surprisingly, almost 64 percent of its assets are invested in materials, financial and real estate sectors. The fund is currently priced at $51.4, trades almost around its net asset value and has a low expense ratio of 0.19 percent. BBAX generated a decent yield and annual average total returns over the past 4.5 years of its existence.

Investments in Stocks of Financial Firms Had a Disappointing Performance

The JPMorgan BetaBuilders Developed Asia Pacific ex-Japan ETF is launched and managed by J.P. Morgan Investment Management Inc. It benchmarks itself against the Morningstar Developed Asia Pacific ex-Japan Target Market Exposure Index, and its portfolio fully replicates the composition of that of its benchmark index. The underlying index targets 85 percent of the stocks traded on the primary exchanges in each country or region by market capitalization, and primarily includes large-and mid-cap companies. The portfolio tends to hold its investments for a longer period of time, as suggested by its low turnover ratio of 14 percent. BBAX also has a high asset base of $4.6 billion.

Top equity investments of BBAX included a bunch of financial stocks such as, AIA Group Ltd (OTCPK:AAGIY), Commonwealth Bank of Australia (OTCPK:CBAUF), National Australia Bank Ltd (OTCPK:NABZY), Westpac Banking Corp (OTCPK:WEBNF), Macquarie Group Limited (OTCPK:MCQEF), ANZ Group Holdings Ltd (OTCPK:ANZGY), Hong Kong Exchanges and Clearing Ltd (OTCPK:HKXCF), DBS Group Holdings Ltd (OTCPK:DBSDF), Oversea-Chinese Banking Corporation Limited (OTCPK:OVCHF), and United Overseas Bank Ltd (OTCPK:UOVEY). All these three markets (Australia, Singapore and Hong Kong) are known for housing some of the largest financial entities of Asia-Pacific. Unfortunately, the overall price performance of these ten stocks was quite disappointing. Only OVCHF and CBAUF generated positive price growth during the past 12 months, and only four stocks (HKXCF, MCQEF, CBAUF and DBSDF) generated price growth in excess of 20 percent over the past 48 months of BBAX’s operation.

Overall BBAX’s Portfolio Was Able to Generate Decent Yield and Total Returns

Significant investments in basic materials and real estate sector included BHP Group Limited (BHP), Rio Tinto Group (RIO), Transurban Group Stapled Securities (OTCPK:TRAUF), Fortescue Metals Group Ltd (OTCQX:FSUMF), Goodman Group Stapled Securities (OTC:GMGSF), and Sun Hung Kai Properties Limited (OTCPK:SUHJY). These stocks, however, performed much better since the fund's inception. During the past 48 months of BBAX’s existence, it has generated an annual average yield of 4.25 percent. JPMorgan BetaBuilders Developed Asia Pacific ex-Japan ETF was formed during August 2018 and has been paying quarterly dividends since then. Average Yield of 2022 was quite high at 6.55 percent. However, due to poor price performance, its total return was not excessively high. BBAX’s annual average total return of 6.8 percent, can be termed decent.

Current Economic Outlook Shows Encouraging Signs with Adequate Cautions

Since the beginning of this year, global economies are sending encouraging signals in the form of cooling in the rate of loss of order books and a marked improvement in business confidence about prospects for the year ahead. The news of China relaxing its COVID-19 containment measures has been extremely beneficial for basic materials and real estate sectors. Financial sector, as we all know, is the direct beneficiary of any form of development or economic growth. Not only did the removal of COVID-19 restrictions lift optimism in the Chinese mainland's manufacturing sector, but also have lifted growth expectations in other economies especially in the Asia-pacific region.

Producers nevertheless remained cautious about the outlook, and are focussing on employment check and inventory reduction policies. Businesses are adopting these policies in order to manage their overheads. Substantial changes in this cautious approach will require a further demand boost for consumer and industrial goods. While the reopening of the Chinese economy will provide a stimulus for demand, the similar trends need to be reciprocated in the developed world, especially in the European and American markets. So far, these markets have remained subdued. This reassigns the fact that the business environment remains challenging and resumption of robust growth is by no means assured. Fortunately, the sectors BBAX focuses on are not witnessing any job cuts, and are on the positive side of cyclical impacts.

Investment Thesis

The portfolio's composition reflects BBAX’s preference for less-volatile segments of the market, as well as inclination toward economies with best credit rating. Despite the presence of some of the world’s fastest growing large economies like China, India, Indonesia, Vietnam, Thailand, Malaysia, etc., JPMorgan BetaBuilders Developed Asia Pacific ex-Japan ETF has preferred to concentrate on least risky markets. Its portfolio is composed of large-cap and mid-cap stocks, and tends to hold its investments for a longer period of time.

I find the JPMorgan BetaBuilders Developed Asia Pacific ex-Japan ETF to be lucrative according to my "7 Factor Model for Evaluating Global Funds." This model consists of a few basic requirements such as current market price of greater than $5, AUM > $200 million, yield > 4 percent, and diversification of its investments among eight major sectors – technology, financial, healthcare, industrial, consumer products, energy & materials, real estate and utilities. The remaining three factors are degree of discount from current NAV, portfolio risks and sustainability of its current yield. These factors help me understand the attractiveness of the fund for both income-seeking investors and growth-seeking investors.

This fund has a significantly large asset base, qualifies for the minimum requirements with respect to stock price, and has a decent average yield since the time this fund has been in operation. BBAX is trading at par with its NAV. Its portfolio is deeply diversified, and carries a low level of risk. In my opinion, BBAX ETF is not suitable for growth-seeking investors, as the annual average total return is not quite impressive. However, income-seeking investors can surely consider this fund due to its decent yield, smart diversification, low risk, and low expense ratio.

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