The flood of assets finding their way into the WisdomTree Japan Hedged Equity ETF (DXJ)—and into other Japan-focused ETFs—are a testament to growing investor confidence that Shinzo Abe's government, hand in hand with the Bank of Japan, will succeed in bringing Japan's economy out of its 20-plus-year deflationary doldrums.
Nearly $2 billion of new net assets has flowed into DXJ in the past month alone, in what has been a steep trajectory to the upside for an ETF that started 2013 with around $1 billion and now boasts more than $4.3 billion in assets. DXJ's momentum particularly picked up after WisdomTree changed the ETF's indexing methodology in November to emphasize companies with big export profiles—the very kinds of firms that stand to benefit the most from a weakening yen.
DXJ has in a way become the poster child for the Japanese recovery under Abe's command. Investors who jumped on the DXJ bandwagon seem to have struck gold. The fund has rallied more than 36.5 percent since mid-November, benefiting not only from rising stocks but peeling out the crumbling yen from its returns. By comparison, the S'P 500 has gained some 13.7 percent in the same period.
DXJ is an equities fund that hedges its exposure to the yen by shorting yen futures and forward-contracts. That mechanism allows DXJ to serve up purer access to Japanese equities than, say, the veteran in the space, the $6.2 billion iShares MSCI Japan Index Fund (EWJ).
EWJ, too, however, has rallied significantly, tagging on gains of some 20.2 percent since mid-November as its portfolio of Japanese equities rallied and investors poured some $1.6 billion into the ETF, but the fund, by design, misses out on the weakening of the yen—the stronger dollar shaves off investor returns.
If the yen were to rise, EWJ would be sitting pretty—as would other equity plays such as State Street's pair of SPDR Japan funds, "JPP" and "JSC," to name a few—and many argue that the yen might be nearing oversold territory, but that remains to be seen.
DXJ Not Only Game In Town
When it comes to tapping Japan, DXJ has become a fan favorite, but it's certainly not the only tool investors have.
From a fundamental perspective, since the prime minister took office in December, the Bank of Japan has already committed to double its inflation target to 2 percent and agreed to support an asset-buying program that could reach $1 trillion this year.
While the BOJ, holding a two-day meeting that ended yesterday, is not expected to roll out any new stimulus measures under the leadership of Governor Masaaki Shirakawa, Abe's nominee to replace Shirakawa—Asian Development Bank President Haruhiko Kuroda—is reportedly a fierce advocate of quantitative easing (QE), and is expected to implement aggressive measures once he takes office this spring.
That's to say analysts and economists, by and large, are betting on Japan's ability to pull off this recovery, with many saying that the Japanese stock market still has a long way to go if it's to revisit highs seen so many years ago. The Nikkei 225, the broad Japanese stock index, is on its way—it has risen more than 38 percent since mid-November, breaking through 12,000 to this week hit its highest level since September 2008.
Race To Debase
Abe's plan to urge the BOJ into buying more Japanese government bonds in the hopes of driving down borrowing rates and the value of the yen is part of a general "race to debase" between developed-world central banks since the crash of 2008 involving the Federal Reserve, the European Central Bank and the BOJ. It's already caused the yen to weaken 15 percent against the dollar in the past four months.
"As the yen has depreciated over the past four months, Japanese equities have appreciated twice as much," WisdomTree's director of research Jeremy Schwartz told. "It's already come down 15 percent and the government of Japan has not done anything yet but talk."
That said, the entire economic stimulus and currency-weakening pursuit, aimed at pumping up growth by 2 percentage points, looks quite ambitious from Japan's perspective, to the extent that it has been in and out of recession since its real estate market crashed in 1990, ushering in an entire era of low growth and deflation.
Moreover, the new QE initiative will dramatically lift Japan's debt, which is already at a level of more than 200 percent of its entire budget. Some analysts wonder if Japan will actually follow through.
20 Japan ETFs To Choose From
In all, when it comes to tapping into Japan, investors have roughly 20 funds to choose from, half of which are equities strategies, while seven bring leveraged and inverse plays on equities and fixed income. They all cost anywhere from 40 basis points to 95.
Deutsche Bank's db-X MSCI Japan Currency-Hedged Equity Fund (DBJP) is essentially the currency-hedged version of iShares' EWJ, as they both are linked to the same MSCI index. DBJP remains a very small fund, having attracted only $5.6 million in the past four months, coming in second to DXJ's first-to-market advantage.
Aside from that, investors can also choose to bypass equities altogether and focus on the yen alone. The CurrencyShares Japanese Yen Trust (FXY) is a fund that does just that, serving up access to the yen without tapping into equities.
The $200 million fund, which came to market in 2007, tracks the price of the yen, meaning it has declined nearly 16 percent since mid-November. Still, investors have poured more than $32 million into the fund in that time period, and many are looking to short the fund.
Finally, risk-loving investors can also buy into leveraged short yen exposure through a double-exposure fund like the ProShares Ultra Short Yen (YCS).
YCS is an inverse play on the dollar-yen cross through a basket of instruments like futures and forward-contracts, options and swap agreements. The fund has attracted more than $62 million in the past four months, surpassing $420 million in total assets, as it rallied 38.6 percent.
The Bond Angle:Not For Everyone
Japan's planned asset purchases have already started to push bond yields lower as the value of government bonds rise.
The yield on five-year Japanese sovereign bonds dropped to record lows late last week, while Japan's benchmark 30-year bond yields have already slipped to 2 ½-year lows following BOJ head nominee Kuroda's assertion that he might open up the asset-buying program to include longer-dated debt rather than keeping it confined to three-year bonds.
The PowerShares DB Japanese Government Bond Futures ETN (JGBL) is the market's only Japan sovereign-debt focused play, aside from an inverse strategy and a pair of triple leveraged/inverse strategies also distributed by PowerShares.
JGBL is tied to a Deutsche Bank index that tracks the performance of 10-year Japan government-issued debt securities, or "JGB," futures. The strategy is designed to serve up exposure to the dollar value of returns of sovereign debt futures of Japan's bonds in a way that was not available to investors until two years ago.
Shorting JGBs has been a popular strategy for many years, and has come to be commonly known as the "widow-maker trade" because it has consistently proved to be a money-losing proposition, as industry sources pointed out.
Indeed, many have tried to pick a top to Japan's bond market rally—as the country's debt rises year after year—losing everything in the process. But there is a growing school of thought that sees new potential for playing JGBs under Abe's regime, although asset flows into the fund—currently netting zero since the beginning of the year—suggest investors are still cautious about that idea.
The $5 million portfolio, which came to market in 2011, is up less than 1 percent since mid-November.
Another deterrent for investors is the fact that there's no ETF tapping into the Japanese fixed income space that hedges out the currency exposure, IndexUniverse ETF analyst Gene Koyfman said.
"If Japan implements quantitative easing that devalues the yen, the negative impact on U.S. investors will offset the benefits of the flattening yield curve," Koyfman said.
|iShares MSCI Japan Index Fund||EWJ||0.53%|
|WisdomTree Japan Hedged Equity ETF||DXJ||0.48%|
|db X-trackers MSCI Japan Hedged Equity||DBJP||0.50%|
|First Trust Japan AlphaDex ETF||FJP||0.80%|
|SPDR Russell/Nomura PRIME Japan ETF||JPP||0.50%|
|SPDR Russell/Nomura Small Cap Japan ETF||JSC||0.55%|
|WisdomTree Japan SmallCap Dividend ETF||DFJ||0.58%|
|iShares MSCI Japan Small Cap Index Fund||SCJ||0.53%|
|iShares S'P/TOPIX 150||ITF||0.50%|
|ProShares Ultra MSCI Japan||EZJ||0.95%|
|ProShares UltraShort MSCI Japan||EWV||0.95%|
|Maxis Nikkei 225||NKY||0.50%|
|CurrencyShares Japanese Ye Trust||FXY||0.40%|
|iPath JPY/USD Exchange Rate ETN||JYN||0.40%|
|ProShares Ultra Yen||YCL||0.93%|
|ProShares UltraShort Yen||YCS||0.93%|
|Fixed Income ETFs|
|PowerShares DB Japanese Govt Bond Futures ETN||JGBL||0.50%|
|PowerShares DB Inverse Japanese Govt Bond Futures ETN||JGBS||0.50%|
|PowerShares DB 3X Japanese Govt Bond Futures ETN||JGBT||0.95%|
|PowerShares DB 3x Inverse Japanese Govt Bond Futures ETN||JGBD||0.95%|
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