U.S. Markets open in 6 hrs 37 mins

Playing A Weak Yen With DBJP

Olly Ludwig


A lot of ink has been spilled about WisdomTree’s currency-hedged ETF “DXJ” in recent months, so it’s time to add an important new fold to this tale.

That fold—the better-performing currency-hedged Japan equity fund, db X-trackers MSCI Japan Hedged Equity ETF (DBJP) from Deutsche Bank—isn’t exactly new, but a few things have changed recently to make it worth discussing, not least that DBJP is finally gathering some assets.

But to begin, let me be totally clear that the WisdomTree Japan Hedged Equity Fund (DXJ) has been very good indeed to investors in the past several months. The performance surge began when Japan’s new leadership started signaling that a massive new round of bond buying was coming up. But it turns out that DBJP’s performance has been better, and my purpose is to argue why that matters now.

The monetary easing, motivated by a desire among policymakers to lift the world’s No. 3 economy from its 25 years of deflationary doldrums via its formidable export sector, has dropped the yen by more than 12 percent in 2013. The move accelerated last week when Japan finally unveiled its first tangible plan to put downward pressure on the currency, after months of strong talk signaling its intentions.

DXJ A Good Deal

In any case, so far this year, DXJ has gained 16 percent, as a weaker yen has lit a flame under Japanese equities. Moreover, the Wall Street Journal reported today that Japan reported February data showing its first current-account surplus in four months, an early sign that exports may be heating up .

To put into perspective the power of hedging out the deleterious effects of the yen’s weakening, consider that the nonhedged Japan equities fund “EWJ” from iShares has returned about 12.5 percent this year—certainly impressive, but clearly weighed down by the currency cross.

It’s no secret by now that DXJ has turned into an asset-gathering magnet for WisdomTree in the past several months. It has pulled in $4.5 billion since last Halloween, right around the time that WisdomTree tinkered with the indexing methodology to tilt DXJ’s portfolio toward exporters.

DXJ is now a $5.68 billion fund, and appears to be rapidly closing the gap with the iShares MSCI Japan Index Fund (EWJ), a $7.5 billion ETF that has long been considered the only game in town in the world of Japan-focused equities funds.

How Much More Yen Weakening?

Whether DXJ does eclipse EWJ as the biggest and most liquid Japan fund and, while we’re at it, whether the fortunes of Deutsche’s DBJP rise, both hinge on how much more yen-weakening comes to pass.

So far this year, as noted, the yen has lost more than 12 percent of its value and more than 19 percent since Halloween, and it takes about 97 yen to buy $1. That’s a ways off from the 134 yen to the dollar level back in early 2002, so there is definitely room to go based on historical levels that now loom large.

Experts disagree about what the future holds, but let’s assume that people like Axel Merk, the renowned currency-focused investment manager, is right that the yen-weakening trend has only just begun.

If that’s so, then investors really do need to look closely at DBJP’s outperformance.



DBJP:Now A Better Deal?

I noted above that DXJ’s year-to-date gains were 16 percent as of April 4, impressive for sure, but less than the 21 percent returns posted by DBJP in the same period. In the past six months, DBJP has returned more than 51 percent compared with DXJ’s nearly 43 percent gain.

DBJP, as the table below shows, is No. 3 on the list of the top-10-performing ETFs so far in 2013.

Top 10 YTD Performers

Ticker Name YTD Performance Weekly Performance AUM ($, mm)
IDXJ Market Vectors Indonesia Small Cap 26.05 -1.24 8.35
BBH Market Vectors Biotech 21.26 1.79 230.29
DBJP db X-trackers MSCI Japan Hedged Equity 21.01 -0.69 24.98
VNM Market Vectors Vietnam 19.04 0.28 457.99
FXG First Trust Consumer Staples AlphaDEX 18.78 -0.75 522.06
KBWP PowerShares KBW Property ' Casualty Insurance 17.81 0.87 24.56
KBWY PowerShares KBW Premium Yield Equity REIT 17.65 1.01 76.94
MORT Market Vectors Mortgage REIT Income 17.50 -0.45 121.17
KBWI PowerShares KBW Insurance 17.47 -0.38 2.52
CSD Guggenheim Spin-Off 17.39 -0.61 151.55


Much of DBJP’s 500-basis-point outperformance this year may be due to the fact the DBJP is a plain-vanilla, capitalization-weighted index fund, which often tends to favor larger companies.

Those big firms are likely to be exporters, and their revenues are significant enough to move the needle more readily in terms of how the effects of a weakening yen might affect sales.

DXJ has some something of a midcap and value tilt, and also employs WisdomTree’s system that screens companies based on dividend payments.

One clear example of how this may be playing out is with Toyota Motor Corp. The world’s No. 1 auto company is among in the top 10 holdings of both funds, but is No. 1 in DBJP at just shy of 6 percent of the portfolio, while it drops to No. 8 in DXJ, at 2.8 percent.

The other advantage that DBJP has is that it’s built around the exact same index as EWJ, the only difference being that DBJP hedges out the yen exposure and EWJ doesn’t. That means investors can accurately assess their holdings if they split their Japan exposure between DBJP and the un-hedged EWJ. It’s a bit more complicated if they have to split Japan coverage between DXJ and EWJ.

The one variable that brings the importance of all these factors into focus is the fact that DBJP is finally gathering assets. In the past several weeks, its assets have crept up to more than $25 million—hardly the magnitude of DXJ’s nearly $5.7 billion, but certainly enough to be considered a viable fund.

Until recently, the fund was getting nowhere fast in terms of attracting assets, and that matters in the world of ETFs. If a fund isn’t terribly tradable, it doesn’t matter that it may have a more compelling index than a competing fund. Returns could get eaten up through gaping bid/ask spreads, even in the course of routine portfolio maintenance procedures, such as rebalancing.

It’s worth noting that DBJP is slightly pricier than DXJ—50 basis points vs. 48 basis points—but that’s small enough to be all but irrelevant.

The point is that DBJP is outperforming DXJ, and that Deutsche’s efforts to reinvigorate sales and marketing efforts has brought DBJP out of the shadows and into the limelight.

Investors need to know that DBJP may indeed be ready for its close-up.

At the time this article was written, the author held no positions in the ETFs mentioned. Contact Olly Ludwig at oludwig@indexuniverse.com .

Permalink | ' Copyright 2013 IndexUniverse LLC. All rights reserved