Time to Buy Japan ETFs as Recovery Gains Momentum?
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Zacks Equity Research
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Japanese stocks have been rallying ahead of the Oct 22 election owing to positive economic data, strong business confidence and improved sentiment in the United States.
The positive data is expected to boost Prime Minister Shinzo Abe’s confidence as he campaigns to convince voters that the Japanese economy is on a healthy path.
Economic Data
Japan’s GDP growth in the second quarter was a lot lower than estimated initially. Per government data released Sep 8, 2017, Japan’s economy grew an annualized 2.5% in the quarter compared with preliminary estimates of a 4% expansion (read: Japan's Q2 GDP Revised Down: ETFs in Focus).
Although Bank of Japan (BOJ) governor Haruhiko Kuroda kept the interest rates at negative 0.1% and maintained the asset buying program in the recent policy meeting, it still has not helped Japan reach anywhere close to its 2% inflation target. Excluding volatile prices for fresh food, consumer prices grew 0.7% in August.
However, the economy seems to be on solid ground. Despite the weaker-than-anticipated growth, GDP has been expanding for six straight quarters, which is a positive. Moreover, recently released economic data has improved investor optimism.
The BOJ released its quarterly survey of over 10,000 businesses, which showed that business confidence among large manufacturers improved to a 10-year high of plus 22 in September from plus 17 in June. A positive reading implies more manufacturers find conditions to be favorable than unfavorable.
Household spending increased 0.6% year over year in August while unemployment rate was 2.8%. Moreover, industrial production increased 2.1% in August on a monthly basis, above a Reuters forecast of 1.9%.
Wall Street Impact
The Federal Reserve decided in its latest policy meeting to leave interest rates unchanged but to begin winding down its $4.5 trillion balance sheet in October. The Fed also maintained its plans of going ahead with another rate hike by the end of this year to a target of 1.25-1.5%, as inflation concerns are easing. This is expected to work in Japan’s favor as the yen will be in check (read: 4 ETF Ways to Profit from a Rise in Dollar).
Moreover, a rise in number of cars purchased in the United States post the Hurricane season led to a rally in Japanese auto manufacturers.
Risks Involved
However, all is not well for the world’s third-largest economy. There are increased tensions relating to North Korea. North Korea conducted its seventh nuclear test, an Inter Continental Ballistic Missile that flew over Japan, on Sep 14, 2017. Moreover, North Korea’s foreign minister Ri Yong Ho suggested that another hydrogen bomb test in the Pacific Ocean might be in the cards.
Increased geopolitical and election uncertainty make us look for currency-hedged ETFs focused on providing exposure to Japan. Although Japanese yen is seen as a safe haven instrument, its proximity to North Korea reduces its appeal for investors who want to park their money in Japanese investments, while assuming the currency risk (see Asia-Pacific (Developed) ETFs here).
WisdomTree Japan Hedged Equity Fund DXJ
This fund is suitable for investors looking for a broad-based exposure to the Japanese economy. It seeks to invest in dividend-paying companies with an export tilt.
The fund has AUM of $8.3 billion and charges a fee of 48 basis points a year. From a sector look, Consumer Discretionary, Industrials and Information Technology are the top three allocations of the fund, with 25.5%, 22.0% and 13.4% exposure, respectively (as of Oct 3, 2017). Toyota Motor Corp, Mitsubishi UFJ Financial Group and Japan Tobacco Inc are the top three holdings of the fund, with 5.4%, 3.6% and 3.4% exposure, respectively (as of Oct 3, 2017). It has returned 11.5% year to date and 25.5% in a year (as of Oct 3, 2017).
Deutsche X-trackers MSCI Japan Hedged Equity ETF DBJP
This fund seeks to provide exposure to Japanese equities with a large-cap focus, while hedging away the currency risk.
The fund has AUM of $1.6 billion and charges a fee of 45 basis points a year. From a sector look, Industrials, Consumer Discretionary and Technology are the top three allocations of the fund, with 21%, 20% and 15% exposure, respectively. Toyota Motor Corp, Mitsubishi UFJ Financial Group and Softbank Group Corp are the top three holdings of the fund, with 4.6%, 2.3% and 2.0% exposure, respectively (as of Oct 2, 2017). It has returned 9.9% year to date and 21.9% in a year (as of Oct 3, 2017).
iShares Currency Hedged MSCI Japan ETF HEWJ
This fund is the currency hedged equivalent of EWJ. It seeks to provide exposure to Japanese equities with a large-cap focus, while hedging away the fluctuations between the USD and JPY.
The fund has AUM of $1.1 billion and charges a fee of 49 basis points a year. From a sector look, Industrials, Consumer Discretionary and Financials are the top three allocations of the fund, with 20.5%, 20.1% and 12.8% exposure, respectively (as of Oct 2, 2017). Toyota Motor Corp, Mitsubishi UFJ Financial Group and Softbank Group Corp are the top three holdings of EWJ, with 4.6%, 2.3% and 2.0% exposure, respectively (as of Oct 2, 2017). It has returned 11.8% year to date and 23.1% in a year (as of Oct 3, 2017).
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