WisdomTree’s currency-hedged ETF focused on Japanese equities looks set to keep running upward now that Japan’s new government launched a $116 billion monetary stimulus package aimed at creating jobs, weakening the yen and ending the deflation that has dogged the world’s No. 3 economy for nearly 25 years.
The WisdomTree Japan Hedged Equity Fund (DXJ) has already had an impressive run since it became clear that Shinzo Abe—a politician focused on expanding the Bank of Japan’s yen-weakening quantitative easing—would become prime minister of Japan last year.
The ETF, which takes the dollar-yen currency cross out of returns, has gained 13 percent in the past month, compared with 5.4 percent for the iShares MSCI Japan Index Fund (EWJ)—the difference being the yen’s 7.4 percent slide against the dollar in the period. Recent flows into DXJ suggest investors understand what’s up.
Abe’s plan to urge the BOJ into buying more Japanese government bonds in the hopes of driving down borrowing rates and the value of the yen is part of a general “race to debase” between developed-world central banks since the crash of 2008 involving the Federal Reserve, the European Central Bank and the BOJ.
That said, the entire economic stimulus and currency-weakening pursuit, aimed at creating 600,000 jobs and pumping up growth by 2 percentage points, looks quite different from Japan’s perspective, to the extent that it has been in and out of recession since its real estate market crashed in 1990, ushering in an entire era of low growth and deflation.
Moreover, the new QE initiative will dramatically lift Japan’s debt, which is already at an anxiety-provoking level of more than 200 percent of its entire budget. Some analysts wonder if doubling down is the right decision, and that, in turn, has planted seeds of doubt as to whether Japan will actually follow through.
“Investors have been burned time and time again betting on a low in Japanese equities, but the recent developments in Japan, Abe’s plans to battle deflation, and the strong yen are some of the most aggressive we’ve seen,” IndexUniverse ETF analyst Dennis Hudachek said recently.
Climbing On The Currency-Hedged Train
While EWJ is a far bigger fund than DXJ, with $5.5 billion in assets compared with DXJ’s $1.4 billion, that gap is narrowing—and with dramatic speed.
Since rumblings of an Abe victory started coursing through financial markets in October and early November, DXJ started raking in assets. The fund ended the third quarter of last year with just under $550 million in assets, but it pulled in more than that in the fourth quarter, ending the year with $1.22 billion in assets.
DXJ’s momentum particularly picked up after WisdomTree changed the ETF’s indexing methodology at the end of November to emphasize companies with big export profiles—the very kinds of firms that stand to benefit the most from a weakening yen.
Prior to this “geographic revenue filter” that went into effect on Nov. 30, the fund had among its top holdings names that derived all of their revenues domestically.
The methodology has clearly paid off.
Since Nov. 30, the fund has attracted net inflows of more than $673.5 million in new investor dollars—which includes $236.7 million so far in 2013. The yen has weakened by about 12 percent in the past three months.
What’s interesting to note is that a competing ETF sponsored by Deutsche Bank that also takes dollar-yen currency fluctuations off the table isn’t gaining any of the traction that DXJ is in terms of asset growth. Since Nov. 30, net flows into the fund remain at zero.
It’s all the more surprising because the db-X MSCI Japan Currency-Hedged Equity ETF (DBJP) is a variation on the MSCI index the huge $5 billion iShares Japan ETF, EWJ, tracks. In theory, that makes DBJP a perfect complement to EWJ.
The problem, at least in part, is that DBJP remains a tiny fund, with just $5.3 million in assets, which means it trades very little and investors will have trouble getting executions when they buy and sell the ETF.
Still, like DXJ, DBJP too has also seen gains of 12 percent in the past month, benefiting from the currency hedge.
Perhaps it’s a matter of being timing:DXJ was first to market in the world of currency-hedged Japan ETFs. It launched in June 2006—almost five years before Deutsche Bank brought DBJP to market.
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