Japan ETFs: One Year After The Fukushima Disaster - ETF News And Commentary
March 11 2012 - 10:34AM
Zacks
Roughly a year ago, one of the most powerful earthquakes in
modern history hit off the coast of Japan. The 2011 Tohoku
earthquake measured 9.0, putting the tremor among the five most
powerful quakes since at least 1900, causing widespread devastation
across the northern part of the country. While the quake was
devastating, the real damage was arguably caused by the subsequent
tsunami which was reported to reach over 130 feet at one point.
This wall of water swept away entire towns on the Japanese
coast, killed over 15,000, and along with the quake/other types of
damage, resulted in close to a quarter trillion dollars in total
economic costs. Yet not even this massive tidal wave would prove to
be Japan’s biggest worry, as the Fukushima nuclear power plant
experienced a significant meltdown throwing much of the nation into
a panic. This plant saw multiple explosions as a lack of coolant
and flooding made it impossible to keep the core at a reasonable
temperature, threatening to make large swaths of Japan inhabitable
for decades to come (read Three ETFs With Incredible
Diversification).
Thanks to this fear, several hundred thousand people were
evacuated, radiation was found in areas directly around the region,
and the safety of nuclear power around the world was called into
question. Many countries quickly renounced the use of nuclear power
while Japan continued to stop the flow of radioactive materials
from damaging its major cities. Luckily, however, the crisis was
eventually halted, and up to this point, there have been no
casualties from what is now widely regarded as the second worst
nuclear accident in human history.
The financial impact from this disaster was also quick and
devastating, shocking the entire country. Japanese investors
quickly repatriated their assets from around the world, pushing up
the yen sharply against major world currencies while the Bank of
Japan sought to provide unprecedented amounts of liquidity to the
beleaguered Japanese markets. Unsurprisingly given the devastation
and the uncertainty over the full impact of the nuclear accident,
there was also a large sell-off in Japanese equities following the
tragedy (read Top Three Currency ETFs).
In fact, the main Japanese ETF, the iShares MSCI Japan
Index Fund (EWJ) sank by
as much as 10% in the week following the tsunami, reigniting more
fears over another lost decade for Japanese securities. This
threat, along with the quick appreciation of Japanese yen has led
to a $230 million outflow from EWJ over the past year, a factor
that led to another period of weakness for the market. This
stretched into the summer as Japanese securities lost more than 20%
of their value at their lowest point in the year.
Despite the tragedy and the headwinds facing the nation, Japan
has managed to bounce back pretty well, especially over the past
two months. Japanese equities have started the year on a pretty
strong note as the country continues to be a relative safe haven
both in Asia compared to many emerging markets, as well as a
developed market alternative to European investments. As a result,
EWJ has surged by nearly 10% so far year-to-date, outpacing a
similar investment in the S&P 500 by nearly 100 basis points in
this time frame (see Ten Best New ETFs Of 2011).
Beyond the gold standard of EWJ, investors also saw similar
performances in a number of other Japanese focused ETFs. The other
funds with large cap holdings, such as the iShares
S&P/TOPIX 150 ETF
(ITF) and the
SPDR Russell/Nomura PRIME Japan ETF
(JPP), both lost more
than 10% over the past 52 week period, roughly in-line with
the performance of EWJ in the time frame. A better alternative,
that still has a large cap focus, has turned out to be the
WisdomTree Japan Total Dividend Fund
(DXJ), which looks
mostly at large cap securities but has a focus on arguably safer
dividend securities. This fund lost just 9.3% over the past year
but has gained close to 13.2% in 2012 so far, meaning it has
outperformed in both time periods.
If investors are looking for small caps instead, there are
currently three options in the space; SCJ,
JSC, and DFJ. All three have
beaten out their large cap counterparts when taking into account
the past one year period, although they have begun to trail when
focusing on 2012. This could be because small caps tend to be more
exposed to local events and thus stand to benefit more than their
export-sensitive large cap peers when the yen is surging in value.
However, as the situation has moderated in recent months and the
economy has picked up, they have lost their leadership role in the
space to mega cap firms (read For Japan ETFs, Think Small
Caps).
So while the disaster that Japan suffered a year ago is still
fresh in the minds of many, equities have broadly shrugged off the
event in recent weeks. All Japanese ETFs are up significantly so
far in 2012—including the new ones that debuted after
Fukushima—outpacing many other developed markets in the time
frame. Clearly, Japan is still on the mend but stocks in the
region could be a decent pick for longer-term investors. The
country has demonstrated tremendous resiliency in the face of
nearly unprecedented turmoil, suggesting that if Japan ETFs can
recover this quickly after a nuclear accident, it will take a whole
lot to keep the Japanese economy down for the count.
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