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A Look at Japanese Small-Cap ETFs


Small-cap Japan exchange traded funds are slated to benefit the most from the Japanese economic recovery and a turnaround in the Nikkei. Many of the Japanese small-cap companies are focused on domestic growth rather than export industries.

“After the rally for the past six months, it’s only natural to see some correction,” said Hisashi Osezawa, chief executive of Tokyo-based J-Flag. “In the long run, small-cap stocks that are more dependent on the domestic market would benefit from an economic recovery.”

The Nikkai 225 Stock Average has plummeted 16% from May 22. The drop was measured from its peak seen last September 28, 2012 when Prime Minister Shinzo Abe took office and promised economic reform for the ailing country. The Bank of Japan was also set to end 15 years of a deflationary cycle, reports Bei Hu for Bloomberg. [Yen ETF Rallies Nearly 3% as BOJ Holds Steady]

“A big part of the rally in the equity market in Japan has been in small- to mid-caps,” Hong Kong-based Gottschalk said. “Some of them may have become too expensive. If there’s any market volatility, liquidity will dry up so the small-cap market will potentially have more risk on the downside.”

The benchmark Nikkei 255 Index was up 1.9% Friday after plunging 6.4% Thursday, the largest decline in three weeks. Despite the latest sell-off in Japanese equities, mostly due to hedge funds selling positions, focused ETFs have still been performing decently. The WisdomTree Japan SmallCap Dividend Fund (DFJ) gained 3.87% last week, while the iShares MSCI Japan Japan SmallCap Index Fund (SCJ) gained 4.12% over the same time period. Both ETFs were among the best-performing non-leveraged ETFs for the week. [Why Retail Investors Still Like Japan ETFs]

Since small-cap companies are more focused on local growth, they have been able to rally from the economic turnaround more so than their large-cap counterparts. The iShares MSCI Japan Index (EWJ) lost 1.3% over the past week, while the WisdomTree Japan Total Dividend Fund (DXJ) lost 4.7% over the same time period. These large-cap ETFs have had a tougher time during the economic recovery since they focus on export industries. Any strength in the Japanese yen can also have an adverse impact on the export industry. While the small-cap focused ETFs have had a positive run over the past week, they still lag large-cap focused Japan stock ETFs in year-to-date performance. [Currency-Hedged ETF Falls with Japan Stocks, Higher Yen]

“We have been taking more of a neutral stance in the past seven years, but what prompted us to increase our exposure was Abenomics,” Yukihiro Sugihara, Hayate’s founder, said in a telephone interview with Bloomberg. “The recent selloff doesn’t quite mean game over.”

WisdomTree Japan SmallCap Dividend Fund

DXJ, ETF, EWJ, SCJ, Japan,

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.