Tag Archives: japan-hedged

Japan In Technical Recession: Time To Buy ETFs On The Cheap?

The Japanese economy is now officially in a technical recession having shrunk 0.2% sequentially in Q3 followed by a 0.3% contraction in Q2. On an annualized basis, GDP fell 0.8% in Q3 trailed by a 0.7% (which was in fact a revised up figure) decline in the second quarter. Economists had expected a 0.2% annualized and 0.1% sequential drop for the third quarter. Per Bloomberg, lower capital expenditure by Japanese companies that resulted in soft business investment and lower inventories in the wake of global growth worries led to this miss. Though the economy is expected to step up in the ongoing quarter as companies are likely to increase output on declining ‘ stockpiles in warehouses ‘, the weak GDP numbers also led to talks about further policy easing. Views that the economy ” might have hit the bottom” in Q3 is widespread now and most people are wagering on a more beefed-up fiscal and monetary policy. Even if the Japanese corporate profile looks steady, sluggish capital spending is now a big hindrance. As per analysts, the soft global and domestic economic backdrop is restraining them from investing aggressively. Not at all. Japanese companies under Nikkei 225 delivered record earnings recently but valuations have swollen only 2.3% from the end of last year, per Bloomberg . About 55% companies under the broader Topix index beat analysts’ estimates this season. Consumer prices in Japan halted year on year in September 2015, falling from a 0.2% rise in August. Inflation in Japan has now fallen back to the level never seen since May 2013 . This boosted hopes for further monetary easing. The BOJ has now delayed the deadline for achieving an inflation target of 2% by six months. If this was not enough, after a stellar run by the ongoing QE stimulus, Japanese equity ETFs are still attractively valued. The popular Japanese ETF iShares MSCI Japan (NYSEARCA: EWJ ) trades at a P/E of 13 times at the currency level. This calls for scope for more returns out of the Japan-based ETFs. However, since yen has devalued considerably thanks to the prevailing easy money policy and the Fed is preparing for a policy tightening, a currency-hedged ETF approach is desirable in Japan investing. Though the economy Minister of Japan recently commented that “at this point the government is still not considering ‘pure’ fiscal stimulus” and that the outcome of wage negotiations for fiscal year 2016 will be a more significant growth driver than fiscal stimulus, there is a clear indication that the economy will gather steam by either one way or the other. WisdomTree Japan Hedged Equity Fund (NYSEARCA: DXJ ) DXJ looks to offer investors a way to gain exposure to the Japanese shares devoid of currency risks. This is a liquid choice in the space with 7,000,000 shares in average trading volume a day. The large-cap oriented fund has a huge asset base of $17.2 billion and charges 48 bps in fees. Toyota Motor (NYSE: TM ) (4.80%), Mitsubishi ( OTCPK:MMTOF ) (4.76%) and Japan Tobacco ( OTCPK:JAPAF ) (4.34%) take the top three spots of the fund while consumer discretionary (24.6%) and industrials (23.2%) are top two sectors. The fund was up 6.5% in the last one month (as of November 16, 2015) and has a Zacks ETF Rank #2 with a Medium risk outlook. Japan Hedged Dividend Growth Fund (NYSEARCA: JHDG ) The ETF follows the WisdomTree Japan Hedged Dividend Growth Index. The fund consists of about 248 companies. The $25.3-million fund measures the performance of dividend-paying common stocks with growth characteristics selected from the WisdomTree DEFA Index while at the same time neutralizing exposure to fluctuations between the yen and the U.S. dollar. Consumer discretionary rules the fund with about 25% exposure. Industrials (23%), IT (13.8%), consumer staples (10.6%) and telecom (10%) also get double-digit weight each. NTT DoCoMo Inc (NYSE: DCM ) (5.5%), Japan Tobacco (4.59%) and Toyota Motor (4.4%) round out the top three spots of the ETF. JHDG charges 43 bps in fees and was up 6% in the last one month. WisdomTree Japan Hedged SmallCap Equity Fund (NASDAQ: DXJS ) DXJS offers exposure to the Japanese small cap stocks while at the same time provides hedge against any fall in the Japanese yen. This is easily done by tracking the WisdomTree Japan Hedged SmallCap Equity Index. The fund has accumulated $196.5 million in its asset base and charges 58 bps in fees per year from investors. Volume is moderate as it exchanges 80,000 shares in hand per day on average. The product holds 618 stocks in its basket with none accounting for more than 0.95% of assets. Industrials and consumer discretionary take the top two spots with around 24% share each, while materials, financial and information technology round off the top five. The ETF gained 4.9% in the last one month and has a Zacks ETF Rank #2. Original Post

Buy: The WisdomTree Japan Hedged Equity ETF

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.