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Battle Of Hedged-Japan ETFs Favors DBJP

Hung Tran

Japan-focused equity ETFs, especially currency-hedged ETFs like the blockbuster WisdomTree Japan Hedged Equity Fund (DXJ | A-45) , were big winners this year, thanks to a Japanese equity market that has rallied nearly 53 percent. But some did better than others, especially if they hedged the yen’s declines against the dollar.

Behind the success of DXJ and, even more so, of the competing currency-hedged db X-trackers MSCI Japan Hedged Equity Fund (DBJP | B-53), is Japan’s ongoing quantitative easing program, which kick-started late last year and is a part of Prime Minister Shinzo Abe’s ambitious “Abenomics” plan to revitalize the Japanese economy after almost 25 years of deflationary pressures.

The Japanese leader’s economic revitalization program also includes an inflation target of 2 percent annually and the weakening of the yen currency. To date, Abenomics has worked wonders for the Nikkei 225, which is now up 52.7 percent year-to-date compared with the S&P 500 Index’s 27.8 percent gain in the same period.

As noted, U.S. investors who have participated in the Japanese equity market rally but have hedged their exposure to the weakening yen have reaped the biggest returns this year. For example, DXJ, the most popular ETF so far this year, has risen 37.9 percent so far in 2013. It’s gathered $9.5 billion in new assets this year, according to data compiled by IndexUniverse.

DXJ, which currently has $12.3 billion in assets, offers direct exposure to Japanese equities, and has a tilt to exporters such as Toyota Motor Corp., Canon and Honda Motor Co., all while neutralizing exposure to currency risk.

DXJ’s returns do, however, trail those of the DBJP, which has gained 45.5 percent year-to-date.


DBJP is a cap-weighted fund and currently holds Softbank Corp., a Japanese telecommunications and Internet corporation; Mitsubishi UFJ Financial Group, a Japanese bank holding and financial services company; and Toyota Motor Corp. as its top three names.


“DXJ has slightly underperformed DBJP, but that has more to do with the fact the DXJ is weighted and selected by dividends as opposed to market capitalization,” said Dennis Hudachek, an ETF analyst at IndexUniverse.

“What’s ironic is that DXJ tweaked its methodology late last year to give exporters heavier weighting in the fund, but even after doing that it still underperformed DBJP, which is a cap-weighted fund,” he added.

Hudachek noted that investors in DXJ are more than satisfied with the fund’s returns year-to-date.

Unhedged equity ETFs also posted solid returns—even after accounting for yen weakness. But they didn’t fare as well as their hedged counterparts.

For example, the iShares MSCI Japan ETF ( EWJ | B-96 ), returned 23.1 percent year-to-date, and the Maxis Nikkei 225 Index ETF ( NKY | B-51 ) rose 27.6 percent.


Charts courtesy of StockCharts.com .

“In 2013, the big story in Japan is whether to be currency hedged or not, because the yen depreciated about 17 percent this year, and that’s huge for a currency movement,” said Hudachek.

For investors keen on simply playing the currency market, that change in the dollar-yen cross was captured by theCurrencyShares Japanese Yen Trust (FXY | A-99). The fund has declined 17 percent year-to-date, outpacing the yen’s decline of 16.7 percent.


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