Japanese Yen ETF Investing 101
Some investors are now thinking that the investment case in Japan has changed. The country appears to be going all in on fighting deflation, as evidenced by recent aggressive monetary easing policies by the Bank of Japan (:BOJ).
Earlier this month, the BOJ initiated a major quantitative easing (:QE) program in an effort to curb the country’s deflation levels and weaken the yen even further. The BOJ plans to double its money supply (cash circulating in the economy plus commercial banks’ reserves with the central bank) and achieve a 2% inflation target within 2 years.
This will hopefully spur spending and borrowing in an economy which has suffered from sluggish business activity and low levels of consumer spending. The central bank has also unveiled its plan to buy riskier assets such as ETFs and real estate trusts as well (read: Small Cap Japan ETFs: Overlooked Winners?).
At the same time, the new Prime Minister, Shinzo Abe, appears quite successful in the depreciation of the yen. The measures taken by the bank to ease monetary policy resulted in further weakness in the yen.
The Japanese yen has seen a sharp fall against the U.S. dollar and Euro over the past few months. In fact, the yen has fallen more than 6% against both the U.S. dollar and the Euro since the announcement of injecting liquidity in the economy. Furthermore, many expect this trend to continue far into 2013, suggesting further woes ahead for this currency.
The falling yen is also boosting the nation’s export as Japan relies more on overseas trade for growth. A weaker yen makes Japanese products more competitive on a global basis, shooting the profit margins up for their key businesses (read: As Yen Weakens, Currency Hedged ETFs Soar).
However, the renewed fears over the global economic recovery might provide some strength in the yen, at least for the near term. Weaker-than-expected Chinese GDP growth in the first quarter of 2013 as well as negative news on manufacturing growth in New York and the U.S. homebuilder sentiment has encouraged investors to buy the Japanese yen.
The Japanese yen also acts as one of the safe-haven currencies and investors may want to consider it if global tensions continue to rise.
Fortunately, there are a number of ETFs to play the currency (both bull and bear). For those interested in taking a non-equity look at Japan, we have highlighted some of the key details for Japanese yen ETFs below, for those seeking to make a targeted play on the nation’s now volatile currency (see more in the Zacks ETF Center):
CurrencyShares Japanese Yen Trust (FXY)
Launched in Feb 2007, this ETF tracks the movement of the yen relative to the U.S. dollar, net of the Trust expenses, which are expected to be paid from the interest earned on the deposited Japanese yen.
This fund appears a great way to play a future rise in the yen relative to the U.S. dollar. However, the product is the worst performing ETF in the developed market currency ETF space, losing 10.47% year-to-date on account of the weak yen.
Moreover, many believe that a better performance can’t be expected out of the ETF going forward, as the yen is expected to further go down in BOJ’s attempt to stir up inflation to aid the economy (read: Japan ETFs: Six Ways to Play the Surge).
In terms of the fund’s structure, the product charges 40 bps a year in fees. Additionally, the ETF sees a good volume of more than 485,000 shares a day and has attracted $119.1 million of assets so far. As a result, the average bid/ask spread is quite small, suggesting low overall trading costs.
The currency ETF has a Zacks ETF Rank of 4 or ‘Sell’ rating, so we expect the pain to largely continue in 2013.
ProShares Ultra Yen ETF (YCL)
This fund seeks to deliver twice (2x or 200%) the daily performance of the U.S. dollar price of the yen.
Due to its double leveraged strategy that involves a great deal of risk, the ETF has failed to attract investors so far in the year having just $3.2 million in AUM. This strategy is expensive, charging investors 95 bps in fees per year. Further, small trading volumes increase the total cost of trading for the product.
Performance and sentiment haven’t helped the fund accumulate assets either. YCL has lost over 21% so far in the year as the trend nature of the yen has helped the fund lose more over the longer time period.
iPath JPY/USD Exchange Rate ETN (JYN)
Launched in May 2007, this note provides exposure to the Japanese yen/U.S. dollar (JPY/USD) exchange rate. This means that when the Japanese yen appreciates relative to the U.S. dollar, the JPY/USD exchange rate increases and the value of the ETN increases and vice-versa (read: What's Next for Currency ETFs?).
The product is unpopular with AUM of $1.8 million and daily average volume of roughly 6,000 shares. Like FXY, the note lost 20.45% year-to-date while charging investors 40 bps in fees a year. The ETF has a Zacks ETF Rank of 4 or ‘Sell’ rating.
ProShares UltraShort Yen ETF (YCS)
For investors looking for a bearish trend in the Japanese yen, YCS could be an intriguing pick. This fund seeks to deliver twice (2x or 200%) the inverse (opposite) return of the daily performance of the U.S. dollar price of the yen.
YCS has a tight bid/ask spread with an average volume of roughly 514,000 shares per day. The fund charges 95 bps in fees per year from investors.
The product has amassed over $563 million in AUM since its inception in Nov 2008. The ETF generated impressive returns of about 21.86% in the year-to-date time frame, which could make it a better fit for some traders given the current sluggish fundamentals in the yen market.
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Read the analyst report on FXY
Read the analyst report on YCS
Read the analyst report on JYN
Read the analyst report on YCL
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