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Why Retail Investors Still Like Japan ETFs


Japanese equities are moving into bear market territory but investors aren’t done with Japan exchange traded funds yet.

The Nikkei 225 Index fell 6.4% on Thursday, a 24% drop from previous highs. When an index falls 20% or more from its high, it is considered “bear market territory,” Sarah DiLorenzo for Associated Press reports. [Japanese Yen ETFs and the Carry Trade]

Retail investors and financial advisors, though, are still interested in Japanese equity ETFs, while some are even buying up more shares in DXJ or EWJ. According to Index Universe data, EWJ has already added $5.4 billion, while DXJ has gathered $7.5 billion in 2013. Traders are saying that any selling in Japanese shares are met with willing buyers.

“You’ve had a massive regime change in Japan,” David Kotok, chief investment officer at Sarasota, Cumberland Advisors, said. “We can afford to be patient.”

Kotok holds the WisdomTree fund and said he is adding to those positions as shares dipped. [Yen-Hedged Japan ETFs Soar as Nikkei Tops 15,000]

On Friday, the Nikkei jumped 1.9% after its largest decline in three weeks.

“Psychologically the market feels like we’re nearly done with the correction,” Juichi Wako, a strategist at Nomura, said in a Bloomberg article. “It’s a good sign the rise in long-term interest rates didn’t harm the U.S. economy. It’s leading to a sense of security in the market.”

“Assuming that Abenomics has not been defeated, we see no reason to become bearish on Japanese stocks, and recommend a bullish stance,” analysts at Nomurasaid in a report.

Last week, the iShares MSCI Japan ETF (EWJ) and the WisdomTree Hedged Equity Fund (DXJ) experienced outflows after ranking as top asset gatherers in 2013. EWJ saw $341 million in outflows, while DXJ lost $146 million. Chris Dieterich for The WSJ reports that for the month of May, all Japan stock ETFs gathered $10 billion, the biggest monthly gain recorded. [Why Japan ETFs Traded at a Discount]

The Bank of Japan has decided against any further monetary easing measures, possibly spurring hedge funds to exit positions in Japanese equities. The iShares ETF is prone to any fluctuations in the Japanese yen, which can impact returns. A rising yen is counter-productive for Japanese manufacturers because it will make their exports more expensive overseas.

In times of a depreciating yen, DXJ and the DBX MSCI Japan Currency-Hedged Equity Fund (DBJP) offer currency-hedged exposure to Japanese equities. [A Closer Look at Two Japan ETFs That Hedge the Yen]

iShares MSCI Japan ETF

EWJ, DXJ, DBJP, Japan, ETFs, Japanese Yen, Global ETFs

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.