With the CurrencyShares Yen Trust (NYSE: FXY) down 3.2 percent year-to-date, it's easy to understand why investors are embracing Japan exchange traded funds and why they are displaying a preference for currency hedged funds over unhedged equivalents.
For the year ended June 2015, investors allocated $48 billion to various currency hedged funds, but those inflows have accelerated in significant fashion this year with the WisdomTree Europe Hedged Equity Fund (NYSE: HEDJ) and the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSE: DBEF) combining for year-to-date inflows of $25.5 billion.
The WisdomTree Japan Hedged Equity Fund (NYSE: DXJ) has added $4.3 billion in new assets this year, a total eclipsed by just five other ETFs, including HEDJ and DBEF. The Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSE: DBJP) and the iShares Currency Hedged MSCI Japan ETF (NYSE: HEWJ) have also been prolific asset gatherers this year, adding $625.2 million and $516.1 million in new assets, respectively.
Still, investors have displayed some affinity for the iShares MSCI Japan ETF (NYSE: EWJ). Only six ETFs have taken in more new assets this year than the unhedged EWJ. EWJ has returned a respectable 13.3 percent this year, but that lags the 14.7 percent average return produced by DBJP, DXJ and HEWJ.
"Despite the strong investor interest, the returns in the past year of these three ETFs are not the same, due to their different approaches. In the one-year period ended July 25, HEWJ rose 28.9%, modestly ahead of the 26.3% gain for DXJ and significantly ahead of the 6.6% for EWJ. EWJ has actually modestly lagged the 6.8% S&P 500 Index, suggesting that investors would have been better suited focusing more domestically," S&P Capital IQ said in a new research note.
There are important differences between the marquee currency hedged Japan ETFs. For example, investors should note that when buying HEWJ, they're simply getting EWJ with a currency hedged overlay.
With DXJ, one of WisdomTree’s seven Japan hedged ETFs, investors get an ETF that is intimately levered to the weaker yen via export-heavy sector allocations. Consumer discretionary, industrial and technology names combine for over 61 percent of DXJ’s weight.
The $1.3 billion DBJP devotes about 41 percent of its combined weight to discretionary and industrial names while sporting a 19.7 percent weight to Japanese financial services firms.
"Meanwhile, the more modest performance difference between HEWJ and DXJ can better be understood with a review of their equity holdings. The WisdomTree product holds companies that derive more than 20% of their revenues from outside of Japan that should benefit as the yen weakens, while iShares products have no such multi-national angle. As such, the sector exposures of the two are not identical. For example, DXJ has more in information technology (13% of assets to EWJ's 10%) and less in telecom services (1% to 5%). HEWJ has the same exposure as EWJ since they both track MSCI indices," according to S&P Capital IQ.
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