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Hedged Japan ETFs to Capitalize Off Additional Stimulus

With the Japanese yen weakening and speculation Prime Minister Shinzo will augment his administration’s stimulus measures, investors interested in the Japanese equities market should consider a currency-hedged exchange traded fund strategy.

The Japanese yen experienced one of its worst weeks since 1999 as the U.S. dollar appreciated to about ¥105.6 from ¥100.5 over the past week.

The long-yen play has diminished in recent sessions as traders anticipate Japanese policy makers could enact greater stimulus measures to goad a slowing economy, especially as market confidence fades in the wake of a potential post-Brexit slowdown.

Related: Japan’s 2016 Monetary Policy – Mistakes and Missed Opportunities

The yen also depreciated after Prime Minister Shinzo Abe’s ruling coalition acquired a majority in the parliament’s upper house. Japanese equities rallied and the yen weakened on hopes that the more hands-on administration would enact further measures to support the economy.

In a statement, Abe said he would use this victory to push forward with his economic reform program, or so-called Abenomics. Abe has even met with former Federal Reserve chief Ben Bernanke, a champion of loose monetary policies.

Related: Japan ETFs Surge on Stimulus Bets After Ruling Bloc’s Landslide Election Win

Looking ahead, we will have to wait until the July 28 and 29 policy meeting to see what further direction the Bank of Japan will provide.

Investors, though, can position ahead of any further additional stimulus measures through currency-hedged Japan country-specific ETFs. As the name suggests, a currency-hedged ETF strategy helps diminish the negative effects of a depreciating local currency against the U.S. dollar – if a foreign currency weakens against the USD, international investors would generate a lower USD-denominated return. The currency-hedged ETFs would essentially outperform non-hedged funds when the foreign currencies depreciate against the U.S. dollar, but the opposite would also be true if the foreign currency appreciates.

The WisdomTree Japan Hedged Equity Fund (DXJ) , iShares Currency Hedged MSCI Japan ETF (HEWJ) and Deutsche X-trackers MSCI Japan Hedged Equity ETF (DBJP) have been go-to options to access Japanese equities markets while hedging against foreign exchange risks. The weakening yen could also bolster these investment options as the three hedged Japan ETFs all track large Japanese companies, which include exporters that benefit from a weak yen.

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Moreover, investors may also consider hedged ETFs that track the more recently launched JPX-Nikkei 400 Index. The JPX-Nikkei 400 Index was launched in January 2014 as a means of reinvigorating the Japanese equity market. The Index employs a rigorous screening process based on return on equity, cumulative operating profit and market capitalization to select high-quality, capital-efficient Japanese companies. As part of the Abe administration’s revitalization plan, the BOJ and large state funds have steered away from conservative bets for riskier equity exposure, including ETFs that track customized benchmarks like the JPX-Nikkei 400 Index.

U.S. ETF investors can also track the benchmark index through relatively new offerings, including the Deutsche X-trackers Japan JPX-Nikkei 400 Hedged Equity ETF (JPNH) and iShares Currency Hedged JPX-Nikkei 400 ETF (HJPX) .

Alternatively, if you still have an uncertain outlook on the Japanese yen and U.S. dollar, an ETF investor may consider alternative options that take a more neutral view on foreign currency movements. For instance, IndexIQ has a handful of 50% hedged/50% unhedged option, including the IQ 50 Percent Hedged FTSE Japan ETF (NYS Arca: HFXJ) .

Related: Japan ETFs Experiencing a Dead Cat Bounce?

ETF investors may also look to some relatively new dynamic or adaptive currency-hedged international stock strategies. For instance, BlackRock offers the iShares Adaptive Currency Hedged MSCI Japan ETF (DEWJ) , which may shift from a 0% unhedged currency exposure to a 100% fully hedged, depending on differences in interest rates, relative valuations, currency momentum and currency volatility.

WisdomTree also offers the WisdomTree Dynamic Currency Hedged Japan Equity Fund (DDJP) , which hedge currency fluctuations in the relative value of the foreign currency against the USD, ranging from 0% to 100% hedge based on interest rate differentials, valuations and relative price momentum of the foreign currencies compared to the USD.

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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.