For Japan ETFs, Think Small Caps - ETF News And Commentary
January 30 2012 - 6:01AM
Zacks
2011 was another rocky time for Japan as the year started off
pretty well for the country as stocks moved sharply higher in the
first two months of the period. Yet, as we all know, this wasn’t
meant to last as the earthquake and subsequent tsunami that hit
Japan in March of 2011 were among the most destructive natural
forces in history. In addition to over 15,000 deaths and hundreds
of billions in damages, the disaster also led to a nuclear
meltdown, an event that we are still learning the full scope
of.
Yet despite this devastation, and the huge sell-off in
everything Japanese after the initial crisis, the country has
rebounded quite nicely in the months following the disaster and
appears to be nearly back on its feet. Assets have been flowing
into the nation at a robust rate, helping to bid up securities
across the nation. In fact, the most popular Japanese ETF, the MSCI
Japan Index Fund (EWJ) saw inflows of close to $1.3 billion in the
past one year period, suggesting high levels of demand for these
securities (read Ten Best New ETFs of 2011).
In addition to searching for beaten down stocks and bargain
buying after the quake, Japan has benefited from being a decent
option in an uncertain time. Slowdowns are impacting a variety of
nations around the globe and debt burdens are threatening to crush
Europe. While Japan certainly has a heavy burden itself, the
country’s high savings rate and large level of domestic
participation in government bond buying are still managing to put
investors at ease for the time being. It also hasn’t hurt that the
country has an extremely low discount rate and can easily borrow in
its own currency, at least at this time.
Beyond stocks in the country, the yen has also seen a surge in
popularity as well. In addition to those flowing into the equity
market, the surge in yen demand is likely due to massive levels of
Japanese repatriation of assets in order to help pay for rebuilding
costs. As a result, the currency has continued to rise
against the dollar and is currently testing levels around the 77
yen mark against the greenback sharply closer than the 52 week high
of 85.5 that investors saw immediately following the quake (read
Three Outperforming Active ETFs).
Yet while the economy of Japan has been surprisingly resilient
in light of these forces, the stock market hasn’t. Major benchmarks
in the nation have slumped, continuing the country’s nearly 20 year
‘lost decade’ for large cap equities. While the situation isn’t
good, there is some hope for those looking to put assets to work in
the nation’s small caps instead. These pint sized securities could
be the go-to asset class thanks to a number of factors stemming
from both the current economic environment and the resulting
investment climate in the country post-tsunami.
Small Caps In Focus
First, investors should note that small caps tend to take their
cues from the domestic economy instead of global events. This could
help them to skirt the worst of the crisis in many developed
nations and some of its major emerging market trading partners as
well. Additionally, and more importantly, is the issue of the
strong yen and its impact on small caps.
Generally speaking, small caps in this country could benefit
from a stronger currency as they do not do a lot of exports but see
a great deal of imports. This could help to keep the price of
commodities, such as oil, reasonable in yen terms giving consumers
in the country more to spend domestically. Obviously, these trends
have pretty much the reverse impact on exporters as a stronger
currency makes their products less competitive on the global stage
forcing profit margins to slump for these key businesses (see
Brazil Small-Cap ETF Showdown).
Thanks to these issues, it is clear that small caps in Japan
could outpace their larger counterparts again in 2012. Luckily for
investors seeking to make a play on the space, there are a few
options available that can offer diversified exposure to the space.
Below, we highlight some of the key details in the small cap Japan
ETF space for those looking to make an allocation to the area for
their portfolios:
iShares MSCI Japan Small Cap Index Fund (SCJ)
This ETF tracks the MSCI Japan Small Cap Index which is a
diversified benchmark of companies domiciled in Japan. The product
holds over 700 securities in its portfolio and puts just under 5%
of total assets in its top ten holdings, suggesting virtually no
company specific risk. In terms of sector exposure, industrials and
consumer discretionary both take up slightly more than 20% although
financials round out the top three with just under 18.2%. The
product charges 51 basis points a year in fees but pays out a solid
dividend yield of just under 2.8% in 30 Day SEC Yield terms (also
read Time To Consider The Small Cap Oil ETF).
WisdomTree Japan Small Cap Dividend Fund (DFJ)
For another way to play the space, investors should consider
DFJ, a product that tracks the WisdomTree Japan Dividend Index.
This benchmark weights securities based on annual cash dividends
paid, giving the biggest weights to those that pay the biggest
dividends. Ironically, this gives the fund one of the lower yields
in the space at just 1.9% in 30 Day SEC Yield terms while fees come
in at 0.58% a year. For holdings, industrials and consumer
discretionary firms both take up more than 21% of assets while
financials again round out the top three although just at 13.2%
this time.
SPDR Russell/Nomura Small Cap Japan ETF (JSC)
For the ETF with the most holdings in the space, JSC is the way
to go as the fund has more than 1,000 securities in its benchmark.
Top holdings by sector include the usual suspects of industrials,
consumer discretionary and financials, although JSC is slightly
more top heavy than the others on the list. In terms of market cap
for these underlying holdings, the weighted average is just $564
million while the largest company is just $2.7 billion. Meanwhile,
for dividends and expenses, these are both in line with the other
small cap Japan ETFs, as the product pays out a little more than 2%
but charges investors close to 55 basis points a year in fees (see
Three Micro Cap ETFs To Play The January Effect).
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