Japan has undoubtedly been one of the most interesting stories in the investing world over the past 10 months. The country was long thought to be stuck in a malaise, though with the election of Shinzo Abe in December, Japanese stocks markets began to take off, while the yen plunged.
For a while in 2013, Japan was easily the best performing major market, posting gains in excess of 25% for the first quarter. However, this did not last as Japanese stocks have since crumbled, losing over 10% in the past one month time frame, calling into question the longevity of the new Prime Minister’s programs (see Inside the Crash in Japan ETFs).
Given this rocky situation and extreme volatility, many traders have likely been having a field day with the Japanese market as of late. After all, the country is home to an extremely liquid market, while the big daily moves have made short-term opportunities pretty widespread.
Yet for investors looking to make a short term, leveraged play on the market the options are few and far between. Currently there are only two such products on the market, the ProShares Ultra MSCI Japan Fund (EZJ) and the UltraShort MSCI Japan Fund (EWV).
These two offer up daily resetting leveraged exposure to the broad Japanese market, targeting the MSCI Japan Index. EZJ focuses in on 200% exposure, while EWV plays the other side of the trade, giving access to -200% returns of the benchmark (also see The Key to International ETF Investing).
While these two have seen more interest lately, the duo hasn’t exactly caught on with investors; less than $100 million is in the space combined. However, with the level of volatility now in the Japan market and the prospect for big moves in the country continuing this summer, two new entrants in the space from Direxion could attract a new crop of investors to the space.
New Direxion Funds
Direxion, one of the leaders in the leverage and inverse ETF market, has just unveiled a pair of Japan ETFs that employ triple leverage. These two look to give investors daily resetting exposure to the MSCI Daily TR Net Japan USD Index, with the Direxion Daily Japan Bull 3x Shares (JPNL) using 300% exposure, and the Direxion Daily Japan Bear 3x Shares (JPNS) utilizing a -300% return (also read Understanding Leveraged ETFs).
The underlying benchmark for the pair are quite spread out with consumer discretionary taking the top spot at 21.7%, followed closely by financials (20.3%), and industrials (18.7%). Both also look to charge investors 95 basis points a year for this exposure.
"We conduct market analysis on a constant basis to identify new opportunities in various regions and sectors for investors who have confidence about the direction of those markets. We see great demand for liquid exposure to Japan," said Eric Falkeis, President of Direxion in a press release. "With these new 3X bull and bear funds, Direxion is excited to be able to allow investors to express an opinion on the economic dynamics taking place that are affecting the Japanese equity market."
How do they fit in a portfolio?
Due to the daily resetting nature of these leveraged ETFs, they probably shouldn’t be used by long-term investors. Instead, they should be utilized by those seeking to make a short-term bet on the direction of the Japanese stock market.
With the kind of volatility that Japanese markets have been seeing, there is definitely money to be made with this strategy, though risks are undoubtedly high. Japan has been on quite the roller coaster ride as of late, with popular Japan ETFs like EWJ and DXJ seeing moves in excess of 4% (both positive and negative) in single day sessions pretty frequently (read DXJ vs. DBJP: Which is the Better Hedged Japan ETF?).
Adding on 3x leverage to this situation—which makes 4% moves turn into 12% moves—could result in some very hectic days for risk-tolerant traders, but also the potential for big profits (or losses). Given this, these new Direxion funds could attract a great deal of interest from short-term traders, so long as the Japanese market remains in focus, and volatility levels stay elevated in this important country.
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