Japan Currency-Hedged ETF Hauls in Over $2 Billion on Falling Yen

ETF Trends

The amount of money investors are throwing at WisdomTree Japan Hedged Equity Fund (DXJ) is simply breathtaking.

The ETF has more than doubled in size just so far in 2013 on a furious rally and massive inflows.

Year to date, the fund has gathered inflows of more than $2.1 billion, placing it second on the list of best-selling ETFs behind iShares MSCI Emerging Markets (EEM), according to IndexUniverse data. These are huge inflows for what is now a roughly $3.5 billion ETF.

DXJ invests in Japanese stocks but hedges its exposure to the movement of the yen. Therefore, it has outperformed unhedged Japan ETFs as the yen plummets following the election of Shinzo Abe as prime minister. Abe is committed to pressuring the Bank of Japan to take further easing measures to weaken the yen and assist Japan’s struggling economy. [Currency-Hedged Japan ETFs]

The db-X MSCI Japan Currency-Hedged Equity Fund (DBJP) follows a similar strategy. [Yen-Hedged Japan ETFs Soar on Easing Speculation]

DXJ and DBJP are both up more than 30% the past three months to double the return of iShares MSCI Japan (EWJ), which does not hedge its currency exposure. CurrencyShares Japanese Yen Trust (FXY), which tracks the movement of the yen against the U.S. dollar, is down over 15% the last three months.

‘Lion’s share’ of ETF inflows

“The Japanese market has been on a tear, but with any foreign market you need to deconstruct the returns,” writes Thomas Brakke at the Research Puzzle blog, noting the “amazing decline” in the yen.

“With performance like that, DXJ is bound to draw assets from those chasing performance. If you’re in that group, be sure to understand that the currency hedge can taketh away too,” he added.

In the fourth quarter, WisdomTree’s (WETF) international equity ETFs brought in $620 million with DXJ responsible for the “lion’s share,” said CEO Jonathan Steinberg during the firm’s Feb. 1 earnings call.

In January, WisdomTree generated $2 billion of inflows, of which $1.1 billion came in through DXJ, which launched in 2006. The ETF was subsequently altered to hedge its currency exposure and recently shifted its strategy to focus more on Japanese exporters. [The Perfect ETF for Higher Japanese Stocks and a Weaker Yen]

“In December, we saw that there was political movement that would be extraordinarily constructive, and we started, from a research side, very aggressively updating our clients as well as the media to the shift within Japan and how well it positioned DXJ for those changes,” Steinberg said. “We tried to just max it out so that the world was aware of this unique exposure in the world of ETFs, and it now takes on a life of its own.”

“Folks are looking for the Japanese exposure, but they are also looking to hedge the impact of the yen,” added Luciano Siracusano, WisdomTree chief investment strategist, on the firm’s fourth-quarter earnings conference call.

WisdomTree Japan Hedged Equity Fund

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Full disclosure: Tom Lydon’s clients own DXJ.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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