HEAD-TO-HEAD: iShares vs Vanguard

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The two funds, both managed by experienced teams, are quite similar in their index replication process.

Both funds track their designated indices by holding  their constituents physically with minimal deviation. “They are both market cap-weighted, simple products offering traditional passive exposure to the market,” according to Lamont.

“Every manager has a choice in exactly how close they want to track the index versus the cost of doing so,” he continued. “Generally, the larger the index, the more costly it is to track because you will get many small companies which may be illiquid and less cost-efficient to trade.”

The indices the two funds replicate consist mostly of large- and mid-cap names that are listed on the Tokyo bourse – a universe of around 2,000 names, Lamont noted.

The iShares fund tracks around 500 Japanese names included in  the FTSE Custom Japan Net of Tax Mid-Day GBP Index. The Vanguard fund is benchmarked to the MSCI Japan Net Return USD Index, which consists of approximately 320 companies.

“The iShares fund offers a representative cap-weighted exposure to Japanese large-cap equities. The FTSE index stands as a better proposition than the more popular but narrower MSCI index,” Lamont said.

Market-cap of holdings

Source: Morningstar

In following the more representative index, the iShares fund has a marginal advantage over the Vanguard fund and the peer group, he noted.

Due to the larger number of holdings, the iShares fund tends to have a broader exposure to smaller companies and can benefit from domestic economic drivers.

“In Japan, smaller companies may have a higher portion of company revenue derived from the domestic market,” he said.

For example, the Japanese car manufacturer Toyota, the top holding equity of both funds, generates a large portion of its revenue from export, whereas comparatively smaller domestic telecom companies derive a higher percentage of revenue from within the country.

Both funds are also well-diversified on the sector and the stock levels, Lamont said. The two funds, however, differ in which sectors get the largest exposure.

Top five sector allocation

Source: fund factsheets

Moreover, to be more efficient in trading less-liquid stocks and to respond quickly to index changes and corporate actions, both funds use futures contracts in managing their portfolios, Lamont said. The use of futures is limited to 1% of their assets.

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