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Japan Hedged ETFs Downgraded to Hold on Strong Yen

Sweta Killa

The currency hedged Japan ETFs were downgraded to a Zacks Rank #3 or ‘Hold’ rating due to the recent rise in yen. The lingering Trump uncertainty in Washington and a fresh round of political worries in Europe, especially in Greece, Italy and Britain, dampened investors’ mood lately and pushed up demand for the safe haven currency Japanese yen (read: Political Jitters Put These Europe ETFs in Focus).  

Notably, yen strengthened less than 1% against the dollar since the Washington turmoil triggered the biggest sell-off in stocks in mid-May. As Japan is an export-oriented economy, a strengthening currency makes its exports uncompetitive, leading to a fall in large cap stocks. The trend is likely to continue given the Fed’s dovish stance for future rate hikes.

Additionally, deflationary pressure remains an overhang on economic growth. Consumer prices rose for the fourth consecutive month in April by just 0.4% led by an increase in energy and fresh food prices. The Bank of Japan expects inflation of nearly 1.4% in the current fiscal year.

However, the country is enjoying its longest stretch of economic growth in more than a decade. A mix of Bank of Japan’s easy money policies and Prime Minister Shinzo Abe’s stimulus and reform through “Abenomics” are paying off, leading to a stock market rally and fat corporate profits. Additionally, the upturn in global activities are providing an additional boost to the economy given that Japan is closely tied to the global market (read: 4 Outperforming ETFs for Japan Exposure).

While bullish economic fundamentals are making Japan a solid play, a strong yen is dulling the appeal for these ETFs. Notably, Japan currency hedged ETFs offer exposure to the country’s stocks while hedging exposure to fluctuations between the U.S. dollar and the yen. These funds tend to generate higher returns than their plain vanilla counterparts when the yen is weakening relative to the U.S. dollar but lower returns in case of a rising yen.

Below, we have highlighted the three currency hedged Japan ETFs that saw their Rank moving lower by two levels from the top Rank #1 or ‘Strong Buy’ rating.

WisdomTree Japan Hedged Equity Fund DXJ

With AUM of $8.5 billion, this ETF tracks the WisdomTree Japan Hedged Equity Index. Holding 347 stocks in its basket, the product is moderately concentrated across securities with none holding more than 4.54% share. Consumer discretionary and industrials take the top two spots with 23.5% and 22.6% 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 4.2 million shares per day and charges 48 bps in annual fees. It has added 2.9% so far this year.

Deutsche X-trackers MSCI Japan Hedged Equity DBJP

This product tracks the MSCI Japan US Dollar Hedged Index, holding 324 securities in its basket with the largest allocation going to Toyota Motor at 4.3%. Other firms account for less than 2.3% of assets. From a sector look, the ETF is well diversified with industrials, consumer discretionary, financials and information technology accounting for double-digit allocation each. The fund has AUM of $1.8 billion and average daily volume of around 687,000 shares. Expense ratio comes in at 0.45%. DBJP has risen 3.9% in the year-to-date timeframe (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. Holding 349 stocks in its basket, consumer discretionary and industrials take the top two spots with over 19% share each followed by financials and information technology. The ETF has amassed over $1 billion in its asset base and sees volume of about 1.3 million shares a day. It charges 49 bps in fees per year from investors. HEWJ has gained 4% 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
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