Capture The Revival In The Japanese Economy With ETFs: iShares MSCI Japan Index, WisdomTree Japan Hedged Equity Fund
Eric Dutram: Several decades of deflation and miserable market conditions have made revival in the Japanese economy in the near-term a difficult possibility. The economy has been in recession time and time again, while the debt burden is reaching legendary proportions.
Some strength in the yen made the circumstances worse, and hurt the exporters of the world’s third-largest economy. The currency gained strength, and Japanese equities fell, resulting in investors’ exit from Japanese equities.
However, the national elections may have turned the fate of the economy. The new government under Prime Minister Shinzo Abe came into power after the mid-December elections, and broad Japanese ETF investments surged as his party took command of the nation.
The index posted a gain of 23% for 2012, closing at 10,395. The Index had posted a 21-month high exceeding at 10,400 a day before the year end, with many feeling more optimistic about investments in the future.
This reversal in fortune is largely thanks to hopes for a more aggressive monetary and fiscal policy. This program looks to revive the economic growth of the country while eliminating deflation once and for all.
Prime Minister Shinzo Abe has asked for unlimited monetary easing by the Bank of Japan in order to weaken and stabilize the currency in order to accomplish this goal. Abe has also set a target for inflation at 2% in order to reverse decades of deflation. The government has also threatened the Bank of Japan with loss of independence if it fails to provide unlimited monetary easing.
The aggressive monetary policy and expectation of further easing, has reduced the yen to lower levels. The yen has dropped to levels of 87 or more to the U.S. dollar, a level not seen since mid-2010. (Japanese Yen ETFs: Any Hope in 2013?)
If the measures taken by the government to ease monetary policy work and result in further depreciation of the yen, this will turn out to favor an export oriented economy like Japan. Japan relies more on exports for growth so a weaker currency could be to its overall benefit.
However, foreign investors should note that weakening of the currency may impact their positions in Japanese equities. It has been noticed that a fall in the yen has negatively impacted the performance of many funds that are unhedged. In such a scenario, currency hedged positions may result in more returns to a foreign investor than the unhedged ones, at least of the trends hold.
Either way, Japanese ETF investments are looking more interesting as we get further into 2013. This is especially true if the current trend in the market place holds and more gains are seen in Japanese stocks.
Investors looking to capture this revival in the Japanese economy can look to invest in ETFs tracking the equities of the economy. Below we have briefly highlighted some of the ETFs of Japan that an investor may want to consider:
iShares MSCI Japan Index ETF (NYSEARCA:EWJ)
For broad exposure in the Japanese market, investors should look to EWJ. The fund is the oldest and most popular ETF tracking the Japanese market.
EWJ offers liquidity to investors with a trading volume of more than 40 million shares a day. The fund has $5.4 billion assets under management which it invests in a large basket of 312 Japanese securities (A Technical Look at the Japanese ETF (EWJ)).
The ETF offers the benefit of diversification to investors with a low concentration in the top 10 holdings. The fund invests only 24.04% of its asset base in these top holdings.
It thereby rules out company risks to a large extent. In terms of individual holdings, Toyota Motor Corp takes the top spot while Mitsubishi and Honda occupy the second and third positions respectively.
Among sectors, Consumer Discretionary, Financials and Industrials are given the top three priorities. The fund charges an expense ratio of 51 basis points a year.
Since EWJ is an unhedged ETF, its performance was somewhat hurt by the strengthening of the dollar against the Japanese yen. However, the product has still been a star performer as of late adding double digits over the past few months.
WisdomTree Japan Hedged Equity Fund (NYSEARCA:DXJ)
DXJ was one of the best performing ETFs in the Japanese space after the attempt to revive the economy through aggressive monetary easing. That is because DXJ has been designed to provide a hedge against currency exposure, a reason why the ETF experienced a huge amount of inflow in the past few weeks.
DXJ offers a broader play on the Japanese stocks providing exposure to 271 stocks. Mitsubishi UFJ Financial Group, Canon Inc and Takeda Pharmaceutical Co Ltd are the top three choices of the fund.
In terms of sectors, Industrials dominate the holding pattern while Consumer Discretionary, Information Technology, Health Care and Materials also get double digit allocation in the fund. The fund charges a fee of 48 basis points on an annual basis Currency Hedged ETFs: Top International Picks?).
Considering that the Prime Minister’s believes that a weak currency will aid the economy, investment in DXJ could turn out to be solid choice for investors. This has been the case so far, as DXJ has outperformed EWJ by a wide margin in the trailing three month period, although there is no telling if this will continue.
Maxis Nikkei 225 Index Fund (NYSEARCA:NKY)
This ETF tracks the Nikkei 225 index and is home to—unsurprisingly– 225 Japanese securities. The fund charges a fee of 51 basis points annually, and it tracks what is termed by many as the DJIA of Japan.
Investors should note that if Abe is successful in its measure to weaken the yen and revitalize the export of the country, this fund could be a strong performer. NKY is heavily exposed to Japanese exporters, so it could see a boost from a weakened currency (Is NKY A Better Japan ETF?).
Despite a large basket of securities, the fund has nearly 33% of asset base in the top ten holdings. Among individual holdings, Fast Retailing, Fanuc Ltd and SoftBank Corp occupy the top three positions while Japanese auto giants Toyota and Honda hold the fifth and tenth positions in the fund.
Lastly, consumer discretionary securities dominate the performance of the ETF as the fund has 21.8% of asset base invested in it. Among others, the fund does not invest more than 7.64%.
WisdomTree Japan SmallCap Dividend Fund (NYSEARCA:DFJ)
For better access to Japanese markets, investors can look to invest in small cap securities of Japan through DFJ. This product is best suited for overseas investor seeking to invest in small cap firms.
The fund is the most liquid small cap fund with highest trading volume and assets under management in the small cap space. It includes and weight firms in its holding based on annual cash dividends paid.
The fund is home to 411 small cap securities and charges a fee of 58 basis points. On account of its dividend focused approach, it generates a good yield of 3.34%. Industrials, Consumer Discretionary, Materials and Financials enjoy double digit allocation in the fund.
db-X MSCI Japan Currency-Hedged Equity Fund (NYSEARCA:DBJP)
With the yen sliding, DBJP is an interesting option to pick with the Japanese economy set to revive after four years of continuous recession and two decades of deflation.
DBJP tracks the MSCI Japan US Dollar Hedged Index, which provides exposure to Japanese equity markets and hedges the Japanese yen to the U.S. dollar by selling Japanese yen forwards. (Is It Time To Buy The Hedged Currency ETFs?)
However, DBJP does not appear to be as popular as DXJ. Since its inception, the fund could manage to amass an asset base of just $5.4 million and trade at very low volume levels. In terms of the total portfolio, like DXJ, it also has its asset base spread across a large basket of over 250 securities.
Among sectors exposure, Industrials is the top priority followed by Consumer Cyclical and Financial Services. This fund’s expense ratio is just 2 basis points higher than DXJ, charging a fee of 50 basis points on an annual basis.
SPDR Russell/Nomura PRIMETM Japan ETF (NYSEARCA:JPP)
JPP seek to match the performance of the Russell/Nomura Prime Index. The fund uses a sampling strategy which leads to 390 securities from a total 1000 securities in a larger index. The fund doesn’t appear to be that popular among investors though, as its trading volume is just 13,300 shares a day.
The diversified fund lists Japan’s three auto giants Toyota, Mitsubishi and Honda as the top three holdings. Among sector holdings, Industrials, Financials, Consumer Discretionary and Information Technology get double digit allocation in the fund.
The impact of Abe’s measures to revive the economy could be seen in its performance as of late, which has easily beaten out the S&P 500. However, this product does cost a bit more than SPY, costing investors 50 basis points annually.