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 (Asia Ex-Japan ETF Investing
101).
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. (read
The Key to International ETF Investing)
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 ETF
(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
(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
(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
(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. (For Japan ETFs, Think Small Caps)
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
(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
(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.
Want the latest recommendations from Zacks Investment Research?
Today, you can download 7 Best Stocks for the Next 30
Days. Click to get this free report >>
DB-XT MS JAP HD (DBJP): ETF Research Reports
WISDMTR-JP SC D (DFJ): ETF Research Reports
WISDMTR-J HEF (DXJ): ETF Research Reports
ISHARS-JAPAN (EWJ): ETF Research Reports
SPDR-RN PR JAP (JPP): ETF Research Reports
MAXIS-NIK 225 (NKY): ETF Research Reports
To read this article on Zacks.com click here.
Zacks Investment Research
Want the latest recommendations from Zacks Investment Research?
Today, you can download 7 Best Stocks for the Next 30 Days. Click
to get this free report
Spdr Russell/Nomura Prime Japan Etf (AMEX:JPP)
Historical Stock Chart
From Aug 2024 to Sep 2024
Spdr Russell/Nomura Prime Japan Etf (AMEX:JPP)
Historical Stock Chart
From Sep 2023 to Sep 2024