Due to the tumbling yen, which has lead to noticeable strength
in Japanese stocks over the past several months, investors are
once again turning their attention to Japan
ETFs
.
While there are multiple ETF avenues for gaining exposure to
the world's third-largest economy, some funds such as the SPDR
Russell/Nomura Small Cap Japan (NYSE:
JSC
) and the MAXIS Nikkei 225 Index ETF (NYSE:
NKY
), arguably do not receive the attention they deserve.
That is a story for another day because resurgent Japanese
stocks and the faltering yen have helped shine the spotlight on
two Japan ETFs over the rest of the group. Those funds are the
iShares MSCI Japan Index Fund (NYSE:
EWJ
) and the WisdomTree Japan Hedged Equity Index Fund (NYSE:
DXJ
).
And with at least one noted commentator espousing the virtues
of EWJ over DXJ, mainly on the basis of perceived liquidity,
investors looking for exposure to Japan would do well to evaluate
the differences between these two ETFs before clicking the "buy"
button.
Being Superficial At a superficial level, there really should
be no debate between these two ETFs. Home to $5.77 billion in
assets under management, EWJ wears the crown as the biggest Japan
ETF.
However, DXJ is no slouch on the size front. In January alone,
the ETF raked in $1.2 billion in new assets,
according to Morningstar
.
In early December, DXJ had just over $500 million in AUM. That
number had grown to over $3.2 billion as of February 7,
according to WisdomTree data
.
Keeping with theme of being superficial, DXJ charges annual
fees of 0.48 percent compared to 0.51 percent with EWJ. That is
one issue to consider when someone says EWJ is "better." Another
is pure performance. Over the past five years, two years, one
year, six months, three months, one month and year-to-date, DXJ
tops EWJ. Actually, over some of those time frames, "trounces" is
the more applicable way of describing DXJ's out-performance of
EWJ.
Ignoring The Obvious Of course, there is a reason why DXJ
outperforms EWJ and why the chasm is noticeably wide in recent
months (DXJ is up over 31 percent in the past 90 days while EWJ
is up 12.6 percent over the same time).
The WisdomTree offering is "designed to provide exposure to
equity securities in Japan, while at the same time hedging
exposure to fluctuations between the value of the U.S. dollar and
the Japanese yen," in the issuers words. Translation: This fund
is the better bet for taking advantage of the tumbling yen
because it is constructed to do just that.
Additionally, it must be noted that while Japan's equity
markets suddenly look good, the domestic economy still has myriad
issues to contend with. In other words, investors should look to
avoid heavy exposure to companies that depend on Japan for
sizable portions of their revenue. DXJ obliges by tracking an
index that
excludes those firms that derive 80 percent or
more their revenue from Japan
.
Liquidity It is easy to assume that EWJ is more liquid than
DXJ based on average daily trading volume. EWJ's is over 30.3
million shares while DXJ's is "just" 1.7 million shares. But
savvy investors know that volume is not the lone gauge of an
ETF's liquidity.
Look at
EWJ's top holdings
. Then do the same
with DXJ
. There are plenty of similarities. Toyota (NYSE:
TM
), Honda (NYSE:
HMC
), Mitsubishi UFJ Financial Group, Canon and scores of other
familiar, heavily traded (both in the U.S. and Japan) Japanese
stocks are found in both funds.
In fairness to EWJ, its bid/ask spreads can be tighter than
DXJ's. At this writing, EWJ's spread is a penny while DXJ's is
three cents. This may seem like bad news for DXJ, but the
question that needs to be addressed is will saving two cents make
up for the almost 1,800 basis points by which DXJ has
outperformed EWJ by over the past 90 days? No, so quibbling over
the bid/ask situation here amounts to being penny wise and dollar
foolish.
There is More Another issue that must be considered is
tracking error, or the amount by which an ETF's returns deviate
from its benchmark index. In fact, an ETF's tracking error can be
more meaningful to the investors total expenses than a two-cent
bid/ask differential.
In a perfect world, all ETF's would deliver returns that
mirror their underlying index minus the expense ratios. However,
the world is not perfect and some ETFs sport
alarmingly high tracking error
. That might be the reason some professional investors
focus on tracking error before expense ratios
when it comes to ETFs.
When it comes the ETFs at hand in this piece, EWJ's tracking
error is not dreadful. Over the past three years, it has been
0.57 percent,
according to iShares data
, though that is slightly higher than the fund's fees.
However, DXJ has done better here as well. In 2010, DXJ
outpaced its index by 0.32 percent, but lagged the index by 0.41
percent in 2011. Last year, DXJ came out on top again by 0.33
percent. Those are not huge numbers, but they do highlight one
thing: If EWJ's tracking error is fair, than DXJ's is pretty darn
good.
When all of the aforementioned factors are added up, the
scenario under which EWJ is preferable to DXJ is hard to imagine.
Frankly, it probably does not exist.
For more on ETFs, click
here
.
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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