The biggest story in ETFs so far this year is the soaring popularity of WisdomTree Japan Hedged Equity Fund (DXJ), which investors are using to invest in Japanese stocks while sidestepping a falling yen.
DXJ is the best-selling ETF in 2013 by a wide margin with net inflows of $3.6 billion. This is incredible demand for an ETF that now holds total assets of $5.3 billion. [Japan ETFs Rake in Cash as Yen Weakens]
The WisdomTree ETF’s currency hedging strategy has protected it from a declining Japanese yen. Therefore, it has outperformed rivals that don’t hedge their currency exposure, such as iShares MSCI Japan (EWJ). Conversely, when the yen strengthens against the dollar, then the WisdomTree ETF will lag EWJ and other unhedged funds.
DXJ also tilts its portfolio toward exporters, which WisdomTree thinks will benefit more from a depreciating yen. In late 2012, the ETF implemented an index methodology change designed to add multinational companies that generate more revenue from global markets rather than the local Japanese market. For example, companies that derive more than 80% of their revenue from Japan are excluded from the index. [ETF for Higher Japanese Stocks and a Weaker Yen]
“We believe the BOJ supports bold action to potentially reverse Japan’s long-term deflationary trend, manifesting primarily in a weaker currency,” said Jeremy Schwartz, director of research at WisdomTree.
Last week, Haruhiko Kuroda was approved as the new governor of the Bank of Japan.
“Speed is of the utmost importance,” Kuroda said during a parliamentary hearing, the New York Times reports. “I intend to pursue bold monetary easing, both in scale and in quality.”
Kuroda’s confirmation “will only provide more ammunition to Prime Minister Shinzo Abe’s inflationary goals,” reports Dan Carroll at the Motley Fool.
“Observers expect Kuroda to go along with Shinzo Abe’s dovish monetary plans that have so far sent the yen into a nosedive against the dollar this year,” Carroll wrote. “Kuroda and his new team will have their first policy meeting at Japan’s central bank next month, and all eyes will be watching to see if any further easing comes as a result.”
“We also believe that we are still in the beginning stages of a potentially big move, with ample room for the yen to further depreciate and equities to continue their gains,” Schwartz at WisdomTree said in a press release. “For some context, the Nikkei 225, a broad Japanese stock index, has to appreciate more than 50% from its current 12,000 levels to reach its early 2007 levels of 18,000, while the Dow Jones Industrial Average reached a new high and S&P 500 is almost past its all-time high. This shows Japanese equities have a significant way to go in order to get back above pre-financial crisis levels.”
WisdomTree Japan Hedged Equity Fund
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.
- Haruhiko Kuroda