As Yen Weakens, Currency Hedged ETFs Soar (DXJ, DBJP)
Eric Dutram: The story of Japan’s latest attempt at economic revival commenced when the government under Prime Minister, Shinzo Abe, took control. Shinzo Abe’s goals clearly focused on monetary policy easing, debt financing, considerable spending on infrastructure and bringing back inflation in order to boost Japan higher.
Shinzo Abe appears to be quite successful at least on one count, namely in the depreciation of the yen. Earlier, the Bank of Japan was unwilling to expand credit in the economy which had resulted in the yen appreciating excessively. The restrictive monetary policy and rising yen acted as a huge drag on the industrial production of Japan.
Yet when Shinzo Abe came to power, he forced the Bank of Japan to implement an unlimited monetary easing policy in order to weaken and stabilize the currency. Abe has also set a target for inflation at 2% in order to reverse decades of deflation or flat prices.
The aggressive monetary policy and expectation of further easing, have reduced the yen to lower levels. In fact, investors now need about 96 yen to buy a single dollar, a figure that is up 24% in just the past six months (Japanese Yen ETFs: Any Hope in 2013?).
However, depreciation beyond 100 may make the situation complex, as it will result in imports getting expensive. Japan imports most of its oil and liquefied natural gas and a depreciation of the yen above 100 will raise the cost of imports for these vital goods.
With the continuous fall in the value of yen, Japanese ETFs that are designed to provide hedge against any fall in the currency continue to rally. Both currency-hedged ETFs – WisdomTree Japan Hedged Equity Fund (DXJ) and db-X MSCI Japan Currency-Hedged Equity Fund (DBJP) – have exhibited strong performances after the cabinet attempted to revive the economy through aggressive monetary easing.
Investors should note that both DXJ and DBJP have posted solid gains of approximately 34.85% and 36.7%, respectively, over a period of six months. We have briefly discussed both the ETFs below for those expecting further yen depreciation and strong Japanese stock prices:
WisdomTree Japan Hedged Equity Fund (NYSEARCA:DXJ)
DXJ was one of the best performing ETFs in the Japanese ETF space after the government attempted to revive the economy through aggressive monetary easing policies. In fact, the fund is one of the top developed market funds over the past half year.
This Japanese ETF has also been designed to provide a hedge against currency exposure, precisely the reason why the ETF experienced a huge amount of inflows in the past months (Currency Hedged ETFs: Top International Picks?).
In terms of holdings, the fund offers a broader play on Japanese stocks providing exposure to 274 equities. Mitsubishi UFJ Financial Group, Takeda Pharmaceutical Co and Canon Inc are the top three choices of the fund.
For 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.
db-X MSCI Japan Currency-Hedged Equity Fund (NYSEARCA:DBJP)
With the yen sliding, DBJP is also an interesting option to pick with the Japanese economy set to revive after four years of continuous recession and 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 $5.6 million and trade at very low volume levels. In terms of total portfolio, like DXJ, it also has its asset base spread across a large basket of 269 securities.
Among sectors exposure, Industrials is the top priority followed by Consumer Cyclical and Financial Services. This fund’s expense ratio is just 3 basis points higher than DXJ, charging a fee of 51 basis points on an annual basis.
If the measures taken by the government to ease monetary policy work and result in further depreciation of the yen, it could favor an export oriented economy like Japan. Japan relies more on exports for growth and both of the aforementioned ETFs could be big beneficiaries as a result.
This is also important to remember for those out there who have ‘regular’ Japanese ETFs like (EWJ) , as these could be hurt by the weakened currency, even if in nominal terms assets appreciate.
Thus, investors will have to weigh the pros and cons of currency hedging, and especially in the case of Japan. Since it appears to be the country’s stated goal to weaken the currency and boost inflation though, a look to these hedged products may be the way to go for the time being in the Japanese ETF space.