Inside The Top Ranked Japan Hedged Equity ETF - ETF News And Commentary


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Japan had a shaky start to 2014 as some European nations made an outward show of power and the yen strengthened against the greenback. But these failed to shake the base of the economy thanks to monetary and fiscal firepower by Prime Minister Shinzo Abe. Since the end of 2012, economic policy in Japan has been all about this policy, also known as 'Abenomics'.

Drastic monetary easing to maintain a target inflation rate of 2%, flexible fiscal policy and structural reforms have made Japan a rising star in the investment universe. For Japan, these measures were welcome steps as the economy has been marred by weak growth as well as low inflation levels for more than a decade.

As a result, investors leaned heavily toward this corner of the investing zone and the Nikkei soared over 50% in 2013, the best yearly performance in more than 40 years for the key Japanese benchmark.

Impressive Q1 GDP

Japan's annualized Q1 GDP of 6.7% bettered analysts' expectations thanks to a rise in business activity. Consumer confidence, which was low prior to the imposition of a 3-percentage point increase in consumption tax in Japan from April 1 for the first time in 17 years, appears to have rebounded lately. Per Bloomberg , consumer confidence picked up in May for the first time in six months (read: Time to Bet on Japan Hedged Equity ETFs? ).

Though the economy will likely slump 3.5% in Q2 to reflect the reduced demand on sales tax hike, per a Bloomberg survey, it will again grow 2% in the following quarter. In fact, based on the Q3 number, Shinzo Abe will reach a decision on hiking the sales tax further to 10% in October 2015 from the current 8%.

However, this step was necessary too as the nation has to tone down its sky-high public debt and perk up inflation. Investors should note that following the impact of sales tax rise in April, Japan's annual consumer prices soared to the 23-year high by jumping 3.4% year over year.

All's Well But Currency Concern

While this flush of liquidity has given equities a solid boost, the Japanese yen has lost substantially versus the U.S. dollar though the move was made only as the weaker currency raised the Japanese companies' export competitiveness. Notably, exports at present remains the key growth driver of the Japanese economy (read: 3 Best Performing Country ETFs of 2013 ).

Also, with the Bank of Japan still looking to continue with its monetary easing measures and the U.S. steadily withdrawing its monetary assistance, the yen will lose more strength against the U.S. dollar. This has made it vital for investors seeking a Japanese flavor in their portfolio to invest in a hedged equity ETF in order to hedge against a falling currency.

While the space sees quite a large number of hedged equity ETFs, a look at the top-ranked ETF in the Japan equity space would be the best way to capture the uptrend.

About the Zacks ETF Rank

The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box or asset class (Read: Zacks ETF Rank Guide ). Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while these also receive one of three risk ratings, namely Low, Medium or High.

The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of the five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other products with a similar level of risk.

For investors seeking to apply this methodology to their portfolio in the Japan equity space, we have taken a closer look at the top-ranked DBJP. This ETF has a Zacks ETF Rank of 1 or 'Strong Buy' rating with a medium risk outlook (see the full list of top ranked ETFs ) and is detailed below:

db X-trackers MSCI Japan Hedged Equity Fund ( DBJP )

This fund looks to track the MSCI Japan US Dollar Hedged Index, before fees and expenses. Holding 312 stocks in its basket, the fund is still somewhat concentrated from a sector perspective (read: DXJ vs. DBJP: Which is the Better Hedged Japan ETF? ).

Consumer discretionary, industrials and financials comprise more than three-fifth of the total assets each taking more-or-less one-fifth of the basket. Beyond this, information technology and materials round out the rest of the top five accounting for 9% and 7% of the portfolio each. From an individual holdings perspective, the product puts roughly 25% of assets in the top 10 holdings.

While the ETF focuses on large caps that account for 96% share, mid cap and cash component take the remaining portion in the basket, with 2% going toward each section. The fund has a nice mixture of blend, growth and value securities, ensuring broad diversification in terms of style.

The product has so far managed assets of over $450 million. Its daily volume level has also been light, suggesting that bid/ask spreads are relatively wide and that total costs will not come in much higher than the 45 bps expense ratio.

Further, it is not highly volatile as indicated by its annualized standard deviation of 22.2%. Also, the fund offers sufficient diversification as corroborated by 16.5% of the R-squared value.

Although the fund may not be a popular choice in the space, its performance has been quite remarkable. DBJP delivered a robust return of about 14% over the last one year and 7.78% in the last one month but lost about 5.6% year-to-date.

Thanks to this decent history and some fundamental tailwinds, this top ranked ETF could be a great pick for many investors interested in the Japan ETF rally, but who are still worried about currency issues in the country.

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DB-XT MS JAP HD (DBJP): ETF Research Reports

WISDMTR-J HEF (DXJ): ETF Research Reports

ISHARS-JAPAN (EWJ): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , ETFs
More Headlines for: DBJP , DXJ , EWJ

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