The JPX-Nikkei 400 Index consists of 400 companies selected in descending order of aggregated scores resulting from a screening process mixing quantitative and qualitative factors. To ensure diversification, the index sets a 1.5% cap at the constituent level. The quantitative filtering is based on ranking scores determined by the companies' three-year average return on equity (40%), three-year cumulative operating profits (40%), and market cap (20%). Equal importance is assigned to both return on equity and operating
profit on the principle that companies with a strong focus on shareholders are also expected to have profitable operations. The qualitative screening focuses on corporate governance credentials.
Eligible companies must employ independent directors, use the International Financial Reporting Standards framework, and disclose comprehensive earnings information in English. The index is rebalanced quarterly, and the basket of constituents is fully reviewed once per year on the last day of August.
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This fund levies an ingoing charge of 0.18%, making it the cheapest ETF tracking the JPX-Nikkei 400 Index and one of the cheapest funds tracking broad-basket Japanese equities. The fund also maintains a sizable cost advantage when compared with active peers.
The annual tracking difference (fund return less index return) for the fund since inception suggests that the total holding cost per year is close to its ongoing charge.
Other potential costs for the investor include bid-ask spreads and brokerage fees when buy and sell orders are placed for the ETF.
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This fund uses the synthetic replication method to track the JPX Nikkei 400 Total Net Return Index. The fund uses unfunded swaps.
Specifically, it buys and holds a basket of securities and simultaneously enters into a
swap agreement with counterparty BNP Paribas, which swaps the index performance (net of swap spread) in exchange for the performance of the fund holdings.
The substitute basket consists mainly of stocks from the Stoxx Europe 600, S&P 500, MSCI Japan, and/or the underlying index. Additionally, the UCITS 5/10/40 diversification rule applies. Up-to-date holdings, which can change daily, are available on the Amundi website. Amundi aims to maintain zero daily counterparty exposure. To achieve this, the portfolio manager resets the swap on a daily basis regardless of exposure. In the event of a swap-counterparty default, Amundi may appoint another swap counterparty, switch to physical replication, or return funds to investors by liquidating the ETF. No securities
lending is implemented within this fund.
Amundi's ETF business seems to be efficiently managed and supported by experienced personnel. Ultimately, however, Morningstar's assessment of Amundi as a steward of capital and its alignment with investors' needs has been found wanting on the actively managed fund side of the business. This is duly reflected in our Parent Pillar rating, which is comprehensive rather than ETF-focused.
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Amundi JPX-Nikkei 400 ETF employs quality filters to provide broad and diversified exposure to a market in which passive funds have performed well. We have awarded this fund a Morningstar Analyst Rating of Bronze.
The JPX-Nikkei 400 Index screens its 400 constituents by several factors, including return on equity, operating profit, and corporate governance credentials. The selected stocks are then weighted by market capitalisation, with a 1.5% cap applied on individual names.
We think the index's screening process is relatively light, and the resulting output broadly resembles its pure market-cap-weighted peers. For example, at the time of this writing, the JPX-Nikkei 400 Index shared around 355 constituents with the similarly sized FTSE Japan Index. The fund shares many characteristics (similar sector weightings and size tilts, for example) with purely cap-weighted peers in a Morningstar Category whose passive strategies we view positively.
While initial fund performance has been encouraging, the strategy lacks a sufficient track record for us to be able to draw any robust conclusions at the current time. However, with an ongoing charge of only 0.18%, the fund is one of the cheapest in the category. The hefty fee gap between this fund and that charged by the median category peer can be expected to be a formidable hurdle for active managers going forward. The fund has tightly tracked its benchmark since inception, lagging it by a little more than its ongoing charge.
At the firm level, we think that Amundi lags the competition in several areas, but we hold the team responsible managing ETFs in high regard. While we think that the quality screening process could be improved (for instance, by adding financial leverage criteria), we remain confident that the fund will outperform its peers on a risk-adjusted basis over a full market cycle. This is because it offers ultra-low-cost, broad, and representative market exposure in a category where many active managers have struggled to add value.
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Launched in January 2014, the JPX-Nikkei 400 Index is somewhat unique in that it owes its existence to government-led efforts to improve Japanese companies' corporate governance. It screens companies according to their profitability, shareholders' return, and superior corporate governance. Dubbed the "shame index," it has generated headlines in Japan and elsewhere as it directly points the finger at companies that are either unprofitable or have demonstrated subpar corporate governance.
The index has been specifically designed to encourage a virtuous cycle of change in the Japanese corporate world by rewarding well-run companies that prioritise the interests of shareholders and by pressuring excluded companies into changing their ways.
Like traditional benchmarks such as the MSCI Japan Index and Tokyo Stock Price Index, the Nikkei 400 weighs constituents based on market cap, except that it does so after selecting stocks based on certain factors. The stock-selection process effectively offers investors quality screened exposure to Japanese equities.
Elsewhere, passive investors have a breadth of cap-weighted indexes from which to select their preferred tool. Of these, the most-tracked index by ETFs in Europe is the MSCI Japan Index. With around 320 constituents, it captures approximately 85% of the free-float-adjusted market cap and is designed to measure the performance of the large- and mid-cap segments of the Japanese equity market.
Broader in terms of size, with around 500 constituents, is the cap-weighted FTSE Japan Index, which also attempts to capture the performance of large- and mid-caps stocks. With its Japan Investable Market Index, MSCI expands coverage to include small caps with around 1,300 holdings, representing 99% of the free-float-adjusted market cap in Japan.
Rounding out the cap-weighted options is the sprawling TOPIX; it approximates total market coverage with close to 2,100 constituents.
We hold a general preference for broader cap-weighted indexes as they tend to be more representative of the total market and therefore a more comprehensive building block. The broader the index, the harder it becomes for active managers to boost relative returns over the long term through stock selection.
Over the trailing 15-year period to March 2019, index Sharpe ratios fell in line with theoretical predictions. The TOPIX was the top performer over the period, followed by the MSCI Japan IMI, FTSE Japan, and MSCI Japan indexes, each of which had progressively lower risk-adjusted returns than the last over the same periods.
Over short periods of time, differences in risk/reward profiles may emerge. Investors seeking exposure to domestically focused Japan and smaller companies should favour the MSCI Japan IMI or TOPIX over the others.
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There are many options to gain exposure to the Japanese equity market. The range of available funds offers investors a variety of standard market-cap indexes as well as strategic-beta indexes. Currently, of all the funds tracking the Nikkei 400 Index, Amundi JPX-Nikkei 400 ETF has the lowest ongoing charge (0.18%).
The MSCI Japan Index, which with around 320 stocks covers 85% of the market, is the most commonly tracked Japanese equity index. Currently, of all the ETFs tracking the MSCI Japan Index, HSBC MSCI Japan ETF has the lowest ongoing charge at 0.19%.
IShares Core MSCI Japan IMI ETF and Vanguard FTSE Japan ETF each offer broader (1,300 and 500 constituents, respectively) exposure than iShares MSCI Japan ETF for a much lower fee (ongoing charges of 0.20% and 0.19%, respectively).
The cheapest Japanese equity exposure is offered by the physically replicated Xtrackers Nikkei 225 ETF, which charges a management fee of only 0.09%. Despite the similarities in name, the Nikkei 225 doesn't employ the same quality filters as its larger stablemate the Nikkei 400, instead weighting constituents solely based on their market price.
Finally, the broadest market exposure to Japanese equity is provided by funds tracking the TOPIX, which is made up of around 2,100 constituents. Amundi Japan Topix ETF currently has the lowest ongoing charge of 0.20%.
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