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Summary An ETF that invests in dividend paying companies incorporated in Japan and listed on the Tokyo Stock Exchange. The end of 20 years of deflation in Japan makes Japanese equities profitable in the current economic state. Abe’s pledge to further lower the corporate tax will stimulate Japanese stock market. Overview of the WisdomTree Japan Hedged Equity ETF (NYSEARCA: DXJ ) The WisdomTree Japan Hedged Equity ETF is an exchange-traded fund incorporated in the USA. It is designed to “to provide exposure to the securities in Japan, while at the same time hedging exposure to fluctuations between the value of the U.S. dollar and the Japanese yen” (WisdomTree.com). The Index is designed to have higher returns than a similar non-currency hedged investment when the yen depreciates relative to the U.S. dollar. Conversely, the index is designed to have lower returns if the yen strengthens against the U.S. dollar. The Fund invests in dividend paying Japan-incorporated companies that derive less than 80% of their revenue from sources in Japan. By excluding companies that derive 80% or more of their revenue from Japan, the index focuses more on companies with significant global revenue base (SEC). (click to enlarge) (Source: Bloomberg) (click to enlarge) (Source: Wisdomtree) The end of 20 years of Deflation Source: inflation.edu After a 20 year boom led by real estate and stocks during the 1970s and the 1980s, Japan experienced huge deflation for the next 20 years. Japan never recovered to the 2% annual inflation which is the hallmark of a proper financial system. However, as Shinzo Abe was elected Prime Minister of Japan, he initiated the “Three Arrows” policy. The policy entailed: (1) printing money to raise prices (2) buying $75B in bonds each month until March 2015 (3) targeting a 2% annual inflation rate (4) weakening the yen (5) increasing spending to create jobs and (6) delay inevitable tax increases. Why Japanese Equities Investing in Japan can be extremely profitable in the current economic state. In September 2015, the Nikkei 225 stock index experienced its biggest one day jump since 2008 because Prime Minister Abe pledged to further lower the corporate tax rate ( Bloomberg ). Compared to the ROE for Tokyo Stock Price Index in 2009, which was -4%, the ROE for TOPIX is now 8.6%. Hence investors should consider purchasing Japanese equities. This significant increase in ROE is indication of Japan’s economic growth potential. Moreover, Japan is still in the monetary easing mode. This quantitative easing program weakened the yen successfully, making the exportation of Japanese goods easier. (click to enlarge) JPYUSD Spot Exchange Rate (Source: Bloomberg) Abe latest pledge to further lower the corporate tax definitely supports Japanese equities. It increased, however, the debt of the country. Indeed, S&P recently downgraded Japan’s sovereign credit rating (marketrealist). Fortunately for Japan, the QE program is likely support stocks in the foreseeable future. Why DXJ DXJ is a perfect ETF that provides exposure to the Japanese equity market while hedging out the currency fluctuations so that the fund can focus purely on the performance of Japanese stocks. It is the best ETF for investors who believe that the yen will continue to weaken against the dollar but are also still seeking to scoop up Japanese equities. If the investor thinks that the yen will strengthen against the dollar, the fund will underperform other broad based Japanese ETF such as the iShares MSCI Japan ETF (NYSEARCA: EWJ ). (Source: etfdb.com as of 10/9/2015) As the yen weakened during the monetary easing mode and Abe recently lowered corporate taxes, it is apparent that DXJ will start to provide better returns than EWJ. Japan’s QE program will make the Japanese companies to export more goods. Since DXJ is composed of companies whose main revenue source is not Japan, DXJ will benefit from Abe’s policy. Symbol 1 Week 4 Week YTD 1 Year 3 Year 5 Year ProShares UltraShort MSCI Japan ETF (NYSEARCA: EWV ) -7.48% -6.89% -22.21% -26.23% -63.18% -68.52% DXJ 5.13% 3.31% 6.78% 8.19% 75.26% 58.00% EWJ 3.86% 3.07% 8.17% 9.40% 38.10% 27.77% SPDR Russell/Nomura PRIME Japan ETF ( JPP) 3.88% 3.53% 8.68% 10.40% 39.03% 31.10% iShares Japan Large-Cap ETF ( ITF) -2.40% -7.74% 6.10% 1.54% 36.45% 25.62% ProShares Ultra MSCI Japan ETF ( EZJ) 7.56% 7.16% 12.27% 13.61% 65.63% 27.51% Deutsche X-trackers MSCI Japan Hedged Equity ETF ( DBJP) 3.98% 2.79% 7.77% 20.34% 104.74% n/a Precidian MAXIS Nikkei 225 Index ETF ( NKY) 2.54% 1.96% 6.95% 8.76% 39.96% n/a (Source etfdb.com) The above graph is the historical data for Japan Equities ETF. DXJ has the second highest one week return and also the highest five year return, showing strength among other Japan ETFs. Symbol Inception ER Commission Free First Trust Japan AlphaDEX ETF ( FJP) 2011-04-19 0.80% Not Available WisdomTree Japan SmallCap Dividend ETF ( DFJ) 2006-06-16 0.58% E*TRADE WisdomTree Japan Hedged SmallCap Equity ETF ( DXJS) 2013-07-01 0.58% E*TRADE ITF 2001-10-23 0.50% Not Available NKY 2011-07-13 0.50% Not Available DXJ 2006-06-16 0.48% E*TRADE WisdomTree Japan Hedged Capital Goods ETF ( DXJC) 2014-04-08 0.48% Not Available WisdomTree Japan Hedged Financials ETF ( DXJF) 2014-04-08 0.48% E*TRADE WisdomTree Japan Hedged Health Care ETF ( DXJH) 2014-04-08 0.48% Not Available WisdomTree Japan Hedged Real Estate ETF (D XJR) 2014-04-08 0.48% E*TRADE WisdomTree Japan Hedged Tech, Media & Telecom ETF ( DXJT) 2014-04-08 0.48% Not Available EWJ 1996-03-12 0.48% 2 Platforms iShares Currency Hedged MSCI Japan ETF ( HEWJ) 2014-01-31 0.48% Not Available iShares MSCI Japan Small-Cap ETF ( SCJ) 2007-12-20 0.48% Not Available DBJP 2011-06-09 0.45% E*TRADE IQ 50 Percent Hedged FTSE Japan ETF ( HFXJ) 2015-07-22 0.45% Not Available WisdomTree Japan Dividend Growth Fund ( JDG) 2015-05-28 0.43% Not Available Deustche X-trackers Japan JPX-Nikkei 400 Equity ETF ( JPN) 2015-06-24 0.40% Not Available (Source etfdb.com) DXJ has an expense ratio of 0.48%, meaning that the fund will cost $4.8 in annual fees for every $1000 of investment, the average ETF however, carries an expense ratio of 0.44% (Morningstar Investment Research). DXJ costs more than the comparable Japanese ETF products and average ETFs. However, ETF implements strategy explained above is more efficient and cheaper than any other products. It is the perfect ETF for investors who are wary of currency changes but are bullish on Japanese stocks. Lastly, the Tokyo 2020 Olympic boost will definitely help Japan recover from the last two decades of economic torpor. Scalper1 News
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