2023-09-14 10:51:58 ET
Summary
- iShares MSCI EAFE Growth ETF includes Japanese tech exposures, which may not be as competitive in the AI race and are vulnerable to the chips war with China.
- The addition of Japan makes the EFG ETF more expensive from a management fee perspective than IEUR.
- We think that Japan requires a more incisive approach and that EFG does not offer that at all. IEUR gives more margin of safety and has lower management fees.
iShares MSCI EAFE Growth ETF ( EFG ) is a fine exchange-traded fund, or ETF, but we think that compared to EU ETFs like the iShares Core MSCI Europe ETF ( IEUR ), the picks in the FE part of the EAFE mix, namely and mainly in Japan, are not the picks we'd prioritize. The Japanese exposure adds a lot of tech exposures from Japan. While some of these are great companies, they are exposed as trading partners to China in the chips war, and are not going to be as ahead as the U.S. players in the AI race, either. We'd rather look at Japanese industrials.
EFG Breakdown
The EFG is EU + a lot of Japanese exposure on a value-weighted basis. It's pretty diversified at 430 holdings. Compared to the IEUR site, there is less financial exposure, more consumer discretionary, and much more tech exposure. Also, the addition of Far East markets adds something to the expense ratio, at 0.36% compared to the IEUR's 0.09%.
Firstly, we don't love the further emphasis on consumer discretionary, especially on cars. While these have been strong performers in Japan due to export exposure and a weak Yen, that's been priced in and we believe this is a good take-profit moment .
In our article on IEUR , we also discuss that a certain amount of trepidation should come with financial and industrial exposures, as many geographies are beginning to see the spectre of slowdown and even deflation in some cases.
But most importantly, we think that the addition of Japanese exposures, adding substantially to the expense ratio, is skewed towards exposures we'd be the least interested in, as segments of the Japanese market are exceptionally undervalued.
The tech exposures of Japan are mainly in electronics, where we are seeing major signs of a glut. In the commodified upstream world of electronics, things are looking pretty rough with the volume picture being pretty weak. What's more is that Japanese electronics exposures are going to be heavily tilted towards China as a trading partner. Chips bans are an issue for this relationship. Finally, Japanese tech exposures are not going to have the same sorts of AI tailwinds that can only exist in cutting edge tech clusters in the U.S.
The exposure to tech still adds a lot to the multiple despite the lack of the most cutting edge AI exposures. EFG has a 25x P/E while IEUR has a 14x P/E. That's a big difference and gives a lot less margin of safety from EFG.
Bottom Line
EFG is really just IEUR + Japan, where Japanese exposures are value-weighted, meaning quite a lot of additional electronics exposure boosting the IT sector allocations.
14% instead of 7% on the IEUR.
There are large swathes of overcapitalized mid and small cap Japanese companies that we'd rather give priority. Japan is a market where not being lazy and making specific picks can really pay. As an ETF, we think IEUR accomplishes a lot more than EFG for the management fee that you're paying.
For further details see:
EFG: We Like To Make Our Picks In Japan