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A Closer Look at Two Japan ETFs that Hedge the Yen


With the Bank of Japan committed to even more aggressive monetary policies, Japanese equity exchange traded funds that hedge their exposure to a depreciating yen have been on a tear.

The WisdomTree Japan Hedged Equity Fund (DXJ) and db-X MSCI Japan Currency-Hedged Equity Fund (DBJP) both hedge currency exposure to the yen – the depreciating yen does not hinder the performance of the yen-denominated holdings, but DBJP has been slightly outperforming DXJ. [Currency Hedged Japan ETF Rallies 40% on Plunging Yen]

Specifically, DBJP is up 10.5% over the past month, 22.2% over the last three months and 25.2% year-to-date, compared to DXJ’s gains of 6.6% over the last month, 17.2% over the last three months and 20.7% year-to-date. In comparison, the non-currency hedged Japanese equity ETF, iShares MSCI Japan Index (EWJ) , rose 5.5% over the past month, 11.2% in the last three months and 12.4% year-to-date.

Both yen-hedged funds offer exposure to Japanese equities with similar investment strategies, but by taking a closer look, investors can see how the two ETFs differ.

“On a fundamental level, a falling yen benefits the export-oriented automobile manufacturers, capital goods manufacturers, and consumer electronics firms–companies that are well-represented in this fund,” writes Morningstar analyst Patricia Oey in an overview of DXJ. “DXJ’s index excludes companies that derive 80% or more of their revenue from Japan, which tilts the index towards companies with a more significant global revenue base.”

For instance, DXJ’s top holdings include large exporter names, such as Takeda Pharmaceutical 5.3%, Canon 4.3%, Honda Motor 4.0%, Japan Tobacco 3.2%, Toyota Motor 3.0%, Nissan Motor 3.0%, Astellas Pharma 2.7% and Itochu Corp 2.2%.

Sector allocations include industrials 22.7%, consumer discretionary 19.2%, information tech 15.3%, health care 14.0%, materials 11.2%, consumer staples 9.9% and financials 7.7%.

In comparison, DBJP takes a broader approach to Japanese equities.

“The BoJ’s bazooka has sparked the buying of Japanese stocks, especially domestic sectors like real estate,” Yasuo Sakuma, a portfolio manager at Bayview Asset Management, said in a Reuters article.

DBJP’s top holdings include Toyota Motor 5.9%, Mitsubishi Financial Group 3.2%, Honda Motor 2.5%, Sumitomo Misui Financial 2.3%, Mizuho Financial 2.0%, Softbank 1.8%, Misubishi Estate 1.7%, Takeda Chemical 1.6% and Canon 1.6%.

Sector allocations include consumer discretionary 23.0%, financials 21.9%, industrials 19.2%, information tech 9.0%, materials 6.9%, consumer staples 5.9%, health care 5.6%, telecom services 4.6%, utilities 2.6% and energy 1.3%.

“The yen’s recent decline has given a real boost to the Japanese stock market but those invested in an unhedged Japanese equity fund didn’t participate as much as those in DBJP,” Martin Kremenstein, Managing Director, Americas Head of Passive Asset Management for Deutsche Asset and Wealth Management, said in a recent interview. “We think the entire Japanese stock market will benefit from a weaker yen, not just exporters.”

For more information on Japan, visit our Japan category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.