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Japan ETFs in Focus on Strong Economic Data

Zacks Equity Research
Mutual Fund Report for TRMCX

Japan’s exports hit a record high as manufacturing activity expanded in January and a weaker yen provided support to exports. Moreover, strong demand across the globe has been a positive for Japan’s trade (read: What Lies Ahead For Japan ETFs?).

Japan’s manufacturing activity in January expanded at its fastest pace in almost four-years, per the Flash Markit/Nikkei Japan Manufacturing Purchasing Managers Index (PMI). PMI increased to 54.4 in January compared with 54.0 in December. The index remained above the 50 threshold that separates contraction from expansion for the 17th consecutive month. 

Into the Headlines

Japan’s exports grew 9.3% in December compared with 16.2% in the previous month and came in below economist expectations of 10.1%, per the Ministry of Finance. However, it helped export growth for full-year 2017 to reach 11.8%, the highest since 2010. By value, Japan’s exports reached 7.3 trillion yen ($66.3 billion) in December, the highest since September 2008.

From a geographical perspective, Japan’s exports to China, its largest trade partner, increased 15.8% year over year in December. Exports to the United States and European Union increased 3% and 11.4% year over year, respectively.

Economic Scenario and Risks Involved

Japan’s economy grew an annualized 2.5% in the third quarter compared with 2.9% in the prior quarter. Bank of Japan’s easy money policies and prime minister Shinzo Abe’s stimulus measures are providing support to economic growth. Moreover, a weaker yen is a positive for manufacturers, as it increases the appeal of Japanese products to foreigners and leads to a rise in exports.

Japan is also subject to geopolitical risks, as Asian markets continue to suffer from massive volatility due to North Korea’s actions. Although bilateral talks over North Korea’s participation in the Winter Olympics has been giving a ray of hope that tensions will ease, latest information from an ex-North Korean spy hints at something else.

Kim Hyon-hui thinks that the regime plans to separate South Korea from its ally, United States. Per an NBC News article citing Hyon-Hui’s statement: "North Korea is using the Olympics as a weapon," Kim Hyon-hui said, adding, "It’s trying to escape the sanctions by holding hands with South Korea, trying to break free from international isolation."

Increased geopolitical uncertainty makes us look for currency-hedged ETFs focused on providing exposure to Japan (see Asia-Pacific (Developed) ETFs here).

WisdomTree Japan Hedged Equity Fund DXJ

This fund is suited for investors looking for a broad-based exposure to Japan’s economy. It seeks to invest in dividend-paying companies with an export tilt.

The fund has AUM of $9.2 billion and charges a fee of 48 basis points a year. From a sector look, Consumer Discretionary, Industrials and Information Technology are the top three allocations of the fund, with 25.0%, 23.0% and 13.5% exposure, respectively (as of Jan 24, 2018). Toyota Motor Corp, Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group are the top three holdings of the fund, with 5.4%, 3.8% and 3.3% exposure, respectively (as of Jan 24, 2018). It has returned 25.8% in a year. DXJ has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.

Deutsche X-trackers MSCI Japan Hedged Equity ETF DBJP

This fund seeks to provide exposure to Japanese equities with a large-cap focus, while hedging away the currency risk.

The fund has AUM of $1.9 billion and charges a fee of 45 basis points a year. From a sector look, Industrials, Consumer Discretionary and Technology are the top three allocations of the fund, with 21.1%, 19.5% and 13.2% exposure, respectively (as of Jan 23, 2018). Toyota Motor Corp, Mitsubishi UFJ Financial Group and Softbank Group Corp are the top three holdings of the fund, with 4.5%, 2.6% and 2.4% exposure, respectively (as of Jan 23, 2018). It has returned 25.4% in a year. DBJP has a Zacks ETF Rank #1 with a Medium risk outlook.

iShares Currency Hedged MSCI Japan ETF HEWJ

This fund is the currency-hedged equivalent of EWJ. It seeks to provide exposure to Japanese equities with a large-cap focus, while hedging away the fluctuations between the USD and JPY.

The fund has AUM of $1.1 billion and charges a fee of 49 basis points a year. From a sector look, Industrials, Consumer Discretionary and Information Technology are the top three allocations of the fund, with 22.1%, 20.6% and 13.4% exposure, respectively (as of Jan 23, 2018). Toyota Motor Corp, Mitsubishi UFJ Financial Group and Softbank Group Corp are the top three holdings of EWJ, with 4.7%, 2.4% and 1.8% exposure, respectively (as of Jan 23, 2018). It has returned 25.6% in a year. HEWJ has a Zacks ETF Rank #1 with a Medium risk outlook.

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WISDMTR-J HEF (DXJ): ETF Research Reports
 
ISHA-CH MS JAP (HEWJ): ETF Research Reports
 
DEUTS-XT MS JPN (DBJP): ETF Research Reports
 
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