iShares MSCI Japan ESG Enh CTB ETFUSDAcc (EUR) | EDMJ |
Morningstar's Take
|29/11/2024by Kenneth Lamont
| IShares MSCI Japan ESG Enhanced UCITS ETF's low fee and broad and representative market-cap-weighted exposure make it a strong option for investors in Japanese large-cap equities. The optimizer approach used to weight holdings is designed to ensure that the fund retains the core benefits of an unscreened MSCI Japan Index tracker, a strategy we favor. Starting from its MSCI Japan Index parent, the MSCI Japan ESG Enhanced Focus Climate Transition Benchmark Index excludes a small number of companies involved in the most severe business controversies. At the time of writing, only seven stocks have been excluded. These include rubber manufacturer Toyoda Gosei, which has been involved in antitrust violations. An optimizer is then used to reweight holdings to maximize exposure to environmental, social, and governance factors while reducing the carbon equivalent exposure to carbon dioxide and other greenhouse gases. The optimization process also aims to reduce the potential emissions risk of fossil fuel reserves by 30%. This approach will suit those looking to improve sustainability metrics without making too large bets against the market-cap-weighted MSCI Japan Index. Backtested data shows that the tracking error against that index has been low (0.83%). The rebalances to meet the above constraints have also seen the strategy incur 5 times the turnover of the parent index, which will translate into higher trading costs for those funds tracking the index. The reliance on an optimizer to decide stock weightings at rebalance does mean the strategy has a "black box" element, meaning it would be difficult for an investor to predict the fund's weightings at the next rebalance. The fact that this fund excludes only a handful of stocks may not suit all ESG investors; those seeking a heavier ESG footprint should look elsewhere. With an ongoing charge of 0.15%, this fund is one of the cheapest funds in the Japan large-cap Morningstar Category. This fund has slightly lagged its average category peer on a risk-adjusted basis over three and five years, but similarly priced MSCI Japan Index trackers have outperformed over longer periods. Investors in all foreign markets should be aware of the potential impact that currency movements can have on returns. For example, a UK-based investor in the Japanese equity markets is exposed to both the returns on the underlying market and the fluctuations in the pound/yen exchange rate. Over long periods, the impact of exchange-rate fluctuations is likely to be a wash, consistent with the historical pattern. IShares has a seasoned passive management team befitting the dominant exchange-traded fund provider in Europe. The team can leverage market-leading technology while managing its funds. |
An optimizer maximizes exposure to ESG factors while reducing the carbon emission exposure. To find out how Morningstar rates a fund click here.
| Morningstar Pillars | |
| People | Above Average |
| Parent | Above Average |
| Process | Above Average |
Morningstar Medalist RatingMorningstar assigns the Medalist Rating to funds that are qualitatively and quantitatively assessed through manager research and algorithmic processes. The assessment turns on three key “pillars” – People, Process, and Parent – that yield an estimate of how well a fund will perform before fees but after adjusting for risk.
