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Japan ETFs Open the Floodgates as Yen Tanks


The two top-selling exchange traded funds in 2013 both invest in Japan. Investors who were underallocated to this market are using the ETFs for quick to exposure to Japan amid unprecedented quantitative easing and inflationary policies.

WisdomTree Japan Hedged Equity (DXJ) has gathered $4.8 billion year to date while iShares MSCI Japan (EWJ) has seen $3.3 billion move in the door, according to IndexUniverse flow data. [Currency Hedged Japan ETF Rallies 40% on Plunging Yen]

Some of the largest flows in the ETF industry are heading to areas where investors are underinvested — in Japan’s case because of hope of change in the country’s economic future after the easing measures designed to battle deflation, said BlackRock CEO Larry Fink in a conference call Tuesday.

“Japan was obviously a country in which historically investors underweighted for years,” Fink added. BlackRock (BLK) manages EWJ and the iShares ETF family.

DXJ is sponsored by WisdomTree Investments (WETF). It’s different from EWJ because the fund hedges its currency exposure to the Japanese yen. Therefore, DXJ will outperform EWJ when the yen weakens relative to the U.S. dollar, and vice versa. [Japan ETFs: BOJ’s Aggressive Plan to End Deflation]

The firm has also filed to launch a small-cap version of the highly successful DXJ. [WisdomTree Plans Small-Cap Yen-Hedged ETF]

DXJ has been in focus for months “with massive inflows and a huge pick-up in trading volume since the beginning of this year, at least partly due to the centralized stimulus from the Bank of Japan, and the ETF has largely taken on a life of its own at this point,” says Paul Weisbruch at Street One Financial.

Earlier this month, the Bank of Japan said it planned  to double its holdings of government bonds and ETFs the next two years. Bank of Japan Governor Haruhiko Kuroda said he will do whatever it takes to meet the 2% inflation target. [BOJ Bombshell: Yen ETF Plummets, Japan Stocks Soar]

DXJ has been a favorite among institutional investors positioning for higher Japanese stocks and a weaker yen. For example, Jeffrey Gundlach, manager of the DoubleLine Total Return Bond Fund, late last year said one of his high-conviction investing ideas was to buy Japanese stocks and short the yen. He predicted the Japanese government would debase the yen to stimulate the economy and the stock market. [Japan ETF Falls to 2012 Low Before Election]

Some Wall Street analysts say it’s still not too late to buy Japan ETFs. Analysts at Credit Suisse are advising clients to add to Japanese equity holdings, MarketWatch reports. They cited BOJ policy, economic growth, allocation shifts, restructuring potential and valuations.

DXJ is up about 51% the past six months while EWJ has rallied 29% over the same period.

WisdomTree Japan Hedged Equity


The opinions and forecasts expressed herein are solely those of John Spence, 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.