In his most recent investment outlook, revealed Tuesday after
the close of U.S. markets, noted bond manager Jeff Gundlach
reiterated his bullish view on Japanese stocks. A fine call to be
sure, particularly because the yen has plunged and the Nikkei 225
has surged in the wake of Shinzo Abe being elected as Japan's new
If November 14, about the time Abe made clear his plans to run
for prime minister again (he previously held the post, but departed
for health reasons), marks a bottom in Japanese stocks, then
Gundlach's call for embracing the iShares MSCI Japan Index Fund
) looks all the more stellar.
EWJ, with $5.38 billion in assets under management, is the
largest and most heavily traded Japan ETF. The fund has rallied
more than 11 percent since November 14, including Wednesday's one
percent gain. Indeed, that performance would indicate Gundlach has
been right about Japanese stocks.
Unfortunately, EWJ's 11 percent return since November 14 is
downright paltry in comparison to the WisdomTree Japan Hedged
Equity Fund (NYSE:
). Since that date, DXJ has returned 20.1 percent.
Along the way, DXJ has seen a massive surge in inflows. In
mid-November, DXJ had $516 million in AUM. That number would
jump to $516 million in early December and then to
$845.2 million by the middle of that month
Indicating that a DXJ's following is not broad-based, the ETF's
AUM total swelled to $1.32 billion as of January 8, 2013,
according to WisdomTree data
However, past performance is no guarantee of future returns.
EWJ is home to 312 stocks, so it does give investors broad
exposure to the Japanese economy and a further equity market rally
there. DXJ has few components at about 270. Again, that is a
statistic that might imply EWJ is the better bet. It is not.
The marquee difference between the two
, and the one that highlights the potential error any investor
makes by embracing EWJ over DXJ, is that DXJ's index runs a screen
that excludes companies that derive the bulk of
their revenue from Japan
Remember, the falling yen is benefiting Japanese exporters and
Japan's domestic economy still faces significant headwinds in the
form of unfavorable demographics and mounting deficits, just to
name two factors. That is not to say EWJ does not offer ample
exposure to Japanese exporters. It does. However, DXJ's efforts to
exclude those firms with a dependence on Japan's domestic economy
has already paid dividends for investors and that trend is likely
to continue if Abe is able to force the Bank of Japan to raise its
inflation target and engage in unlimited monetary easing.
To be fair, even legendary
investors make mistakes with country-specific
. For example, several smaller Brazil ETFs have sharply
outperformed the iShares MSCI Brazil Index Fund (NYSE:
) since Ray Dalio's Bridgewater Associates took a stake in EWZ in
the second quarter of 2012.
Of course, if the current trend with Japanese holds the rally
remains in tact, Gundlach will not be "wrong" with EWJ, but
investors following his trade might wish they had considered DXJ
For more on Japan and ETFs, click
(c) 2013 Benzinga.com. Benzinga does not provide investment advice.
All rights reserved.
Gain access to more investing ideas, tools & education.
Get Started on Marketfy, the first ever curated
& verified Marketplace for everything trading.