Vanguard FTSE Asia ex Japan Shares ETF (ASX: VAE) is a sensible choice for exposure to Asian equities, excluding Japan. 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 Pacific ex Japan Australia and New Zealand Index in Australian dollars. The opportunity set comprises large- and mid-cap stocks covering 10 Asian countries. Vietnam will be included in the index upon implementation in September 2026, following a reclassification from frontier to secondary emerging market, with a projected weight estimate of 0.2% in 2027. With 2,082 companies as of March 2026, the FTSE index draws ahead of the Morningstar Category index (the MSCI All Country Asia ex Japan Index), which comprises roughly 1,000 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 30% as of March 2026. Other major country exposures include India, Taiwan, and South Korea, together representing around 56% 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 Asia Pacific ex Japan Australia and New Zealand Index, giving broad exposure to Asian stocks, excluding Japan. Although skilled active managers have demonstrated the ability to deliver strong outcomes, the strategy’s low fee provides a durable advantage to investors.

The structural inefficiencies of Asia ex-Japan markets cap diversification potential

The FTSE Asia Pacific ex Japan Australia and New Zealand Index 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 Pacific 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, Taiwan, and India, which were 30.0%, 24.5%, and 15.4%, respectively, of the portfolio as of March 2026. Sector allocations were dominated by technology and financial stocks, each representing above 20%. The top 10 stocks accounted for 29.4% of the portfolio, with Taiwan Semiconductor Manufacturing, the largest individual position, at 13.6% as of month-end March 2026.

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 13%.