DXJS WisdomTree Japan Hedged SmallCap Equity Fund

WisdomTree (WETF) has long been known as an ETF provider focusing on dividend-weighted products, and also international markets. It is in this international space where WisdomTree has really made a name for itself though, particularly in the case of Japan.

In 2006, WisdomTree put out the Japan Hedged Equity Fund (DXJ) offering up investors a way to gain exposure to Japanese shares, but without the fluctuations of the yen against the dollar. In other words, this fund looked to outperform other Japan ETFs when the yen was tumbling against the dollar, but likely underperform when the yen was strong.

This product languished in a state of unpopularity for years, until the election of Shinzo Abe and the implementation of ‘Abenomics’ changed the status quo in Japan. With his election, the Japanese yen tumbled against the dollar, benefiting exporters and causing the Japanese stock market to surge (read Time to Focus on Yen-Hedged Japan ETFs?).

However, in dollar terms, the rise of the Japanese stock market was muted, so any investor who bought into a product like the iShares MSCI Japan ETF (EWJ), lost out against its competitors like DXJ. In fact, for a six month stretch from November 2012 to May 2013, DXJ added over 50% compared to a 32% gain for EWJ, cementing the WisdomTree product as a go to choice for Japanese exposure.

This solid level of outperformance—and speculation over further losses in the yen—caused many investors to pile into the product to the tune of over $10 billion in assets under management. Now, DXJ makes up close to one-third of all of WisdomTree’s assets under management, making it a blockbuster ETF for the small issuer.

Replication in other markets?

Thanks to this success, WisdomTree has embarked on a huge currency-hedged ETF campaign, putting out several of these to a variety of markets around the world. This includes broad Europe (HEDJ), several individual European countries like the UK (DXPS) and Germany (DXGE), and back to Asia again for Korea (DXKW) and Japan SmallCap (DXJS) products too (see Inside the New Korea Hedged ETF).

These have seen varying levels of success so far in their short time periods on the market, though HEDJ has accumulated over half a billion on its own. And while this is a pretty solid currency-hedged ETF lineup, it doesn’t appear that WisdomTree is done just yet, as evidenced by recent SEC filings.

SEC Filings in Focus

The latest filings once again focus on hedged products for Japan, this time with a sector focus. Filings with the SEC include hedged products targeting the following sectors in Japan: health care, capital goods, tech/media/telecom, financials, and real estate.   

While some of these segments—in particular those with a heavy export tilt—could make some sense, others seem to be almost too specialized. It is also important to note that such specialized sector products don’t even exist for the unhedged Japan market, so it is questionable if the demand is there for Japan sector funds at this time.

Bottom Line

WisdomTree had great success with DXJ, but this is almost to the point of taking it too far. Investors haven’t really embraced their smallcap fund yet, as it has less than $30 million in assets under management (see For Japan ETFs, Think Small Caps).

There is also the issue of what the next steps for Abenomics are at this point. A huge currency depreciation campaign has already begun, and in many ways, has already stabilized. It seems unlikely at this time that even more losses will come for the yen, especially when you consider that the yen, as represented by FXY, is actually up against the dollar when looking at the past six months.

Given this, it is hard to say that these products will have that much appeal from a hedged-currency perspective, as the days of losses for the yen appear to be over for now. Fortunately these proposed funds, if ever approved, will have a monopoly on Japanese sectors, so there might be some decent interest from this perspective (see Short Japan with These ETFs).

The real story here though is that WisdomTree is doubling down on its currency-hedged ETF program in a country that has provided a huge chunk of its assets under management. The firm currently has half a dozen such products, and while many might have thought this would be the end (for now) of this lineup, it appears as though WisdomTree has other plans.

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WISDMTR-J HEF (DXJ): ETF Research Reports
 
WISDMTR-JP HSCF (DXJS): ETF Research Reports
 
ISHARS-JAPAN (EWJ): ETF Research Reports
 
CRYSHS-JAP YEN (FXY): ETF Research Reports
 
WISDOMTREE INV (WETF): Free Stock Analysis Report
 
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