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Japan ETFs: An Epic Move Could be Near


Saying U.S. stocks have been the only developed markets game in town this year is, well, wrong. In local currency terms, Japanesee stocks have been the best developed market equities and the race has not even been close.

Regarding ETFs, the WisdomTree Japan Hedged Equity Fund (DXJ) has outpaced the S&P 500 (^GSPC) by 500 basis points. DXJ has also beaten the iShares MSCI EAFE ETF (EFA) by two-to-one.

Another big move could be on the horizon for DXJ and rivals such as the db X-trackers MSCI Japan Hedged Equity Fund (DBJP) and the iShares MSCI Japan ETF (EWJ) .

Since the Nikkei’s tumble and yen’s rally in May, “both the Nikkei 225 and the USD/JPY cross have been consolidating for over six months in a symmetrical triangle with well-defined converging trendlines,” writes Eagle Bay Capital President J.C. Parets.

Over the past three months, DXJ, the to asset-gathering ETF this year with inflows of nearly $8.5 billion, has gained 6.4%. That’s barely better than EFA and well behind the S&P 500. However, the longer Japanese stocks and USD/JPY consolidate, the more market participants seem to be anticipating a breakout to the upside. [More to Come for Hedged Yen ETFs]

That may not be the case. Parets notes a longer-term chart of the Nikkei 225 shows Japan’s benchmark index met resistance at downward sloping trendline earlier this year.

Chart Courtesy: Eagle Bay Capital

“When we see a six-month long consilidation coil in the ways that Nikkei and Dollar/Yen have this year, the resolution is typically violent. So yes, I think there’s definitely a big move coming. It’s the direction of that move that gets tricky,” said Parets.

A violent move in USD/JPY is of particular note to ETFs like DXJ and DBJP, which have soared because of their hedged yen component, benefiting not only as Japanese stocks rose but also as the yen weakened.

DXJ has been so successful that WisdomTree introduced the WisdomTree Japan Hedged Small Cap Fund (DXJS) in late June and has filed plans for five more DXJ-esque sector ETFs. [WisdomTree Could Introduce DXJ Sector ETFs]

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of DXJ and EFA.

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.