One of the hottest stories in the investing world over the past few months has been the roaring market of Japan. Thanks to an extremely accommodative central bank, some impressive reflationary policies have been put into place in the nation, with incredible effects so far.
At least in the short term, these moves appear to have rekindled some optimism—at least over the equity market—in the country, while pushing the yen to fresh lows as well. In fact, the yen is currently trading around the 100 level when compared to the dollar, while the Japanese benchmark Nikkei has soared over the past few months to new heights as well (read Play a Resurgent Japan with These Three ETFs).
The Nikkei is actually at multi-year highs, having recouped all of its losses from the financial crisis in pretty much just the past eight months. And with inflationary policies expected to continue, some are optimistic that this could finally push Japan out of its malaise and back onto solid economic footing.
ETF Plays on Japan
This move in the Japanese stock market has pushed many investors into Japanese ETFs like the ultra-popular iShares MSCI Japan Index Fund (EWJ) or the Maxis Nikkei 225 Index Fund (NKY). While these have been solid plays in their own right, shrewd Japanese ETF investors sought out currency hedged plays instead.
These ETFs offer up the same exposure to the Japanese stock market, but without the influence of the yen. This improves returns when repatriated back to dollars during times of yen weakness. Obviously, this has been the case so far in 2013 as the yen, as represented by FXY, has fallen by about 14% YTD and over 22% in the past six months (see Invest Like Mark Cuban with These ETFs).
In this type of environment, Japan ETFs that do not have to worry about yen fluctuations have easily beaten out their unhedged counterparts. Though, it is worth noting that pretty much every fund in the Japan sphere has done well this year with gains far in excess of the S&P 500 for 2013.
Hedged ETFs for Japan
Currently, there are two ETFs that offer up exposure to Japan without the currency risks; the WisdomTree Japan Hedged Equity Fund (DXJ) and the db-X MSCI Japan Currency-Hedged Equity Fund (DBJP). While the two have both seen a big bump up in interest over the past few months, the vast majority of new capital has flowed into DXJ.
Year-to-date, DXJ has seen inflows of nearly $6 billion, a pretty impressive figure considering that the fund’s total AUM is $8.6 billion, meaning that the vast majority of the fund’s assets came into the product in the past few months. DBJP on the other hand, currently stands at just $73 million in assets, with almost $60 million of that capital coming into the fund during 2013 alone (read Q1 ETF Asset Report: Japan ETFs Reign).
This is obviously a massive disparity between the two (relatively) similar funds and it suggests that investors have definitely favored DXJ over its db-X counterpart. Part of the reason is probably due to DXJ having been around for a bit longer and its cheaper cost, as it beats out DBJP by two basis points a year in fees.
Additionally, assets often beget more assets in the ETF world, and the snowball effect in terms of AUM accumulation has definitely been at play in this market. After all, investors tend to favor more popular funds for higher levels of tradability and better bid ask spreads, so DXJ has definitely been a beneficiary of this trend as well.
However, investors should note that despite popular perception, DBJP has actually been the far better play for quite some time. DBJP has easily beaten its more popular counterpart in the 3 month, 6 month, and trailing one year time frames, and by a pretty wide margin too.
The main difference between the two is the underlying index. DBJP follows the MSCI Japan Index while DXJ tracks the WisdomTree Japan Hedged Equity Index (read Currency Hedged ETFs: Top International Picks?).
This means that DBJP follows the same benchmark as the ultra-popular EWJ, just without the yen fluctuations. Meanwhile, DXJ tracks a relatively unknown benchmark that provides a tilt and focus towards exporting companies, as these are believed to be prime beneficiaries of a weak domestic currency.
While one cannot deny this logic—especially for a big exporting country like Japan—it hasn’t really played out that way so far. Instead, the more ‘traditional’ approach in the Japanese ETF market has actually be the better choice for investors seeking the most bang for their buck.
DXJ vs. DBJP:
1 (Strong Buy)
1 (Strong Buy)
3 Month Return
Japan is an ultra hot story that has given investors huge gains so far in 2013. However, certain plays on the market, like those that hedge out yen exposure, have done far better, leading to truly impressive returns over the past few months.
Currently, there are two plays in this segment, and while both have done quite well, the lesser known fund, DBJP, has actually been the better performer by a wide margin. So if you are betting on Japan's continued resurgence, definitely consider DBJP as a hidden gem in this increasingly attractive space for possibly better performing Japan hedged ETF exposure.
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