Japan had a rough run in 2011, after the March earthquake and tsunami halted the stock rally of the first two months. In 2012, small-cap focused shares and exchange traded funds tracking Japan could help rebuild and strengthen investment into the country.
“The main argument for investing in international equities is for diversification through exposure to different economies and foreign currencies. However, many of the holdings in broad international funds are giant multinationals whose global sales and production strongly resemble those of the United States-based multinationals that dominate the S&P 500 companies. In the past 10 years, the correlation between the MSCI EAFE Index (Europe, Australasia, and the Far East) and the S&P 500 has been 90%. Small-cap foreign companies, on the other hand, cater more to their local markets,” wrote Patricia Oey, in a Morningstar fund analysis. [Taking A Bold Move with Japan ETFs]
If investors want to get exposure to small-cap stocks in Japan, they may consider these ETFs:
- iShares MSCI Japan Small Cap Index Fund (NYSEArca: SCJ) This fund has about 700 companies in its index, with none given more than a 5% weighting. This allows equal representation and there is no country specific risk. Industrias, consumer discretionary and financials are the top sectors represented, and the expense ratio is 51 basis points, with a dividend yield of 2.8%. [Japanese Yen ETF Creeping Higher After Intervention]
- WisdomTree Japan Small Cap Dividend Fund (NYSEArca: DFJ) Top sectors include industrials, consumer discretionary and financials, and the dividend yield is 1.9%. The benchmark weights on highest dividends paid, and the expense ratio is 0.58%. [ETF Chart of the Day: Dividend Funds]
- SPDR Russell/Nomura Small Cap Japan ETF (NYSEArca: JSC) The largest company is about $2.7 billion in the 1,000 share index, and weighting that are top heavy include industrials, consumer discretionary and financials. A dividend of 2% is paid, and the expense ratio is at 0.55%.
Small cap companies in Japan could prosper from a stronger yen, which would help commodity pricing for consumers in the country, reports Eric Dutram for Zacks. Japan’s economy does carry a heavy burden but the country’s high savings rate and high level of local participation in bond buying for the government are keeping investor interest stable.
Tisha Guerrero contributed to this article.