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Japan ETFs in Focus as Shinzo Abe Wins

Abbott (ABT) reported earnings 30 days ago. What's next for the stock? We take a look at earnings estimates for some clues.

The landslide victory of prime minister Shinzo Abe in a snap election has infused further optimism in the economy and the stock market. Per Japanese media, Abe's Liberal Democratic Party and a small coalition partner had together secured at least 312 seats in the 465-seat lower house of parliament, passing the 310-barrier for a two-third majority.

The success has bolstered his chances of winning another three-year term next September, putting Abe on course to becoming post-war Japan’s longest-serving leader.

The victory suggests the continuation of “Abenomics” which hinges on three tactics, namely extreme monetary easing, flexible fiscal policy and structural reforms. “Abenomics” has been paying off lately with six straight quarters of economic growth representing the longest stretch of uninterrupted growth in more than a decade. Expanding manufacturing activity, rising domestic and export orders and strengthening demand are fueling growth in the economy (read: Time to Buy Japan ETFs as Recovery Gains Momentum?).

Other Abe policies such as a hard line on North Korea, close ties with Washington including defense, and push for nuclear energy are the other growth engines.

Market Impact

Abe’s win extended Japanese stocks longest winning streak with Nikkei rising 1% to its highest level since 1996. Meanwhile, yen dropped to a three-month low against the U.S. dollar as an ultra-loose monetary policy will remain in place for longer. A weaker yen is benefiting exporters and the manufacturing industry, resulting in soaring stock prices (read: Japan ETFs in focus as Nikkei soars).

Japan is primarily an export-oriented economy and a weaker currency makes its exports more competitive. The yen is likely to remain weak in the weeks ahead given the approval of a budget blueprint for the 2018 fiscal year by the U.S. Senate, tax reforms and expectation for further rates hike that would continue to boost dollar.

That said, many investors may want to take a closer look at the ETFs targeting this nation. While there are several Japanese equity ETFs that could see good trading in the weeks ahead, we have highlighted five funds that have a favorable Zacks ETF Rank #3 (Hold) and superior weighting methodologies.  

iShares MSCI Japan ETF EWJ

This is the ultra-popular fund targeting the Japanese economy with a total asset base of over $16.7 billion. It tracks the MSCI Japan Index and holds 321 stocks in its basket. Though it is slightly skewed toward the top firm, Toyota Motor, at 4.67%, other firms do not account for more than 2.24% of assets. The product is widely spread out across industrials, consumer discretionary, information technology and financials that make up for double-digit exposure each in the basket. It trades in heavy volume of 5.7 million shares per day and charges 48 bps in annual fees. The fund has gained about 18.5% so far in the year (read: Japan ETF Hits New 52-Week High).

iShares MSCI Japan Small-Cap ETF SCJ

This fund offers exposure to the small-cap segment by tracking the MSCI Japan Small Cap Index and holds 852 stocks in its basket. It is widely spread out across components with none holding more than 0.64% of assets. However, about one-fourth of the portfolio is allotted to industrials, closely followed by consumer discretionary (17%), information technology (12.2%), materials (10.6%) and consumer staples (10.4%). The fund has managed AUM of $217.9 million whiles sees a lower average daily volume of around 32,000 shares. Expense ratio comes in at 0.48%. The fund has gained 22.6% so far this year.

WisdomTree Japan Hedged Equity Fund DXJ

With AUM of $8.5 billion, this ETF offers exposure to the Japanese equity market while hedging exposure to fluctuations between the U.S. dollar and the yen. It follows the WisdomTree Japan Hedged Equity Index, holding 402 stocks in its basket. The product is moderately concentrated across securities with none holding more than 5.45% share. Consumer discretionary and industrials take the top two spots with 25.2% and 21.9% share, respectively, while information technology and financials round off the top four with double-digit exposure each. The fund trades in solid volume of around 8.5 million shares per day and charges 48 bps in annual fees. It has added 16.5% so far this year.

Deutsche X-trackers MSCI Japan Hedged Equity DBJP

This product also provides hedging strategies and tracks the MSCI Japan US Dollar Hedged Index, holding 323 securities in its basket with the largest allocation going to Toyota Motor at 4.6%. Other firms account for less than 2.3% of assets. From a sector look, the ETF is well diversified with industrials, consumer discretionary, information technology and financials accounting for double-digit allocation each. The fund has AUM of $1.7 billion and average daily volume of around 470,000 shares. Expense ratio comes in at 0.45%. DBJP has risen 16% in the year-to-date time frame (see: all the Developed Asia Pacific ETFs here).

iShares Currency Hedged MSCI Japan ETF HEWJ

This is a hedged version of the popular fund (EWJ). The ETF has amassed nearly $1.2 billion in its asset base and sees volume of about 894,000 shares a day. It charges 49 bps in fees per year from investors. HEWJ has gained 16.2% since the start of the year.

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ISHARS-JAPAN (EWJ): ETF Research Reports
WISDMTR-J HEF (DXJ): ETF Research Reports
ISHA-CH MS JAP (HEWJ): ETF Research Reports
DEUTS-XT MS JPN (DBJP): ETF Research Reports
ISHARS-MS JA SC (SCJ): ETF Research Reports
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