Japanese ETFs have been leading the market higher for much of 2013. The space was in focus thanks to ‘Abenomics’ and a concentrated effort by the nation’s central bank to weaken its currency and shock the markets back into a state of growth.
In the last few months, this policy was certainly having a large impact on the market, as Japanese shares soared and the yen plunged against the dollar. This led many to believe that Japan was back on track and that nothing could stop the country from returning to economic prominence (read Invest Like Mark Cuban with these ETFs).
Nothing Goes Straight Up
However, this incredible run—which saw major Japan ETFs surge by over 30% in the last six months—has been under some pressure as of late, as demand for profit taking intensifies, and concerns grow over the real health of many economies. These worries came to a head after the latest Fed minutes release, leading to a one session loss of 7% for the Nikkei, marking one of the worst days in the Japanese markets in years.
There were a number of factors that led to a horrendous day in Japan, coming from a variety of markets. First, the uncertainty over the Fed’s policy in the near term was definitely a catalyst, as some grew worried over a tapered bond buying program in the U.S. and its impact on Japanese securities.
Furthermore, Chinese PMI figures came in below 50, meaning that the nation’s manufacturing segment is in a state of contraction. This cast a shadow over the rate of growth in key Asian growth markets, which are becoming increasingly important for Japan and the nation’s exports.
Lastly, investors also witnessed some pretty extreme volatility in the Japanese government bond market as well. This segment saw yields on the benchmark 10-year rise to just shy of 1.0%, before retreating all the way back to the 0.85% mark (read Japanese Bond ETF Investing 101).
This confluence of factors led to some severe profit taking in the Japanese market, especially considering that the Nikkei was actually up a few percentage points in the early part of trading today. However, this obviously didn’t last, leading to one of the worst days in Japanese markets since the 2011 earthquake and ensuing Fukushima nuclear incident.
Unsurprisingly, this horrendous trading made for an extremely bad day in the Japanese ETF world. Funds in this space also saw big losses on huge volumes, stopping cold their recent winning streaks too.
iShares MSCI Japan Index Fund (EWJ)
WisdomTree Japan Hedged Equity Fund (DXJ)
Maxis Nikkei 225 Index Fund (NKY)
WisdomTree Japan Small Cap Dividend Fund (DFJ)
ProShares Ultra MSCI Japan (EZJ)
ProShares UltraShort MSCI Japan Fund (EWV)
As you can see, the terrible trading was pretty widespread on the session, impacting broad market funds, large cap focused ones, and small cap-centric products as well. Interestingly, small caps did among the worst on the day, while the hedged products—thanks to a surge in the yen—were also big losers on the session (see Which is the Better Hedged Japan ETF?).
While some might be panicking about Japan at this time, it is important to remember the longer term history for Japanese ETFs. The run in this market has been pretty incredible over the past few months, and especially so for a developed market country in today’s low growth environment.
Given this, it isn’t that surprising that we had a big sell-off in Japan ETFs, as one was probably long overdue. One cannot expect a huge market like Japan to surge to such impressive heights without at least a few bumps along the way, and that is definitely what we have seen in recent trading in this market.
We are still optimistic on Japan ETFs in the near term, as we have top Zacks ETF Ranks on a number of products in the space. The thinking here is that the easing measures still have a bit of room to run, and a stock boost is definitely possible in the near term given the concentrated QE effort (see the full list of Top Ranked ETFs).
So consider the recent bout of terrible trading as a possible entry point if you are still thinking about getting in on Japan, as the country could certainly rebound in the weeks ahead. This could be especially true once worries over U.S. QE and sluggish emerging market data blow over, allowing Japan ETFs to resume their impressive ascent once more.
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