Eric Dutram: Amid shakiness in the developed world, Japan seems to be potentially back on track after a long time. The new Prime Minister, Shinzo Abe, has promised to resurrect the economy and to prevent uncontrolled rise of the currency.
He has asked the Bank of Japan (BOJ) to take on unlimited monetary easing in order to weaken the Japanese currency with an aim to revitalize exports.
Last month, the BOJ committed to double the inflation target to 2% to fight deflation but decided to start “open-ended” asset purchases next year. Abe mentioned that if the Bank fails to improve growth, he would take further strong measures, and possibly even curtail the bank’s independence (read: The Key to International ETF Investing).
In such a backdrop, the Japanese ETF – the iShares MSCI Japan ETF (NYSEARCA:EWJ) – has gained strong momentum and is showing a nice run-up in its prices, surging over 4% year-to-date. This is the oldest and most popular ETF tracking the Japanese market and seeks to match the price and yield of the MSCI Japan Index, before fees and expenses.
Assets have been flowing into the nation at a robust rate, helping to bid up securities across the nation. In fact, EWJ saw inflows of close to $364 million so far this year, suggesting high levels of demand for these securities.
The product provides extreme liquidity, trading in average volume of more than 22 million shares per day. This ensures that the bid/ask spread is very tight and does not involve any extra cost beyond the expense ratio of 0.51%.
The fund has $5.6 billion assets under management which it invests in a large basket of 312 Japanese securities. It offers higher diversification benefits to investors with a low concentration (24.64%) in the top 10 holdings. Toyota Motor (NYSE:TM) takes the top spot with 6.4% share, while Mitsubishi UFJ (NYSE:MTU) and Honda Motor (NYSE:HMC) round up to the next two positions, with 3.2% and 2.7% of EWJ respectively.
Other securities do not hold more than 2% of the assets in the basket. It thereby rules out individual company risks to a large extent.
From a sector perspective, the product is heavily skewed toward consumer discretionary and financials that make up for more than 20% share each in the basket. This is closely followed by industrial with a 20% share. Other sectors make a nice mix of the portfolio (read: Financial ETFs Set to Rally in Earnings Season).
Further, the fund focuses more on large cap securities, which are ready to boom after a decade when all the aforementioned measures for the nation will come into effect. Based on the impressive portfolio, diversification benefits, and the nation’s efforts to improve growth, EWJ will likely trend higher in the near future. This is further supported by the positive trends indicated in the chart below:
After a long time, the ETF is actually trading above its 9, 50, and 200 EMA, signaling a bullish trend for this popular product. The fund even crossed its resistance level of $10.00 and managed to stay over it for 4 consecutive days. It has also witnessed a bullish breakout accompanied by very high volumes of late (see more ETFs in the Zacks ETF Center).
Further, the product is often considered a high momentum (the change in the fund’s price over the past three months) ETF with value closer to 113, suggesting that it will continue to move higher relative to its counterparts. All these trends suggest that EWJ is now in a clear uptrend and poised to reach new highs as we push further into the year.