Well-documented are Japan's economic woes. No longer the
world's second-largest economy, the land of the rising sun is
plagued by unfavorable demographics, soaring debt, tepid (at
best) economic growth and anemic equity market returns.
China has wrested the crowns of Asia's largest economy (and
the world's second-largest overall) from Japan, while a
strengthening yen has punished Japanese equities for several
years now. The rising yen has prompted a seemingly endless spate
of bullish valuation calls on Japanese stocks. However, returns
remain lackluster, implying investors would be well-suited to
play Japan on a hedged basis.
"We believe Japan-based multinational companies that generate
the bulk of their revenues from markets outside of Japan are more
likely to benefit from a weakening yen," said WisdomTree Research
Director Jeremy Schwartz in a note. "Companies with a purely
Japanese revenue base, on the other hand, are unlikely to benefit
from a weakening yen, especially if imported materials are part
of their production process. Essentially, while a weakening
currency can make exports more attractive for foreign consumers,
it can also make imports less attractive, as these prices would
tend to increase as the currency weakened."
The WisdomTree Japan Hedged Equity Fund (NYSE:
), which has almost $516 million in assets under management, is
one ETF investors can use to gain Japan exposure while hedging
against dollar/yen fluctuations. Year-to-date, the WisdomTree
Japan Hedged Equity Fund has outperformed the iShares MSCI Japan
Index Fund (NYSE:
). Both have trailed the the MAXIS Nikkei 225 Index ETF (NYSE:
DXJ has the potential to be even more alluring following an
upcoming tweak by WisdomTree (NASDAQ:
) to the WisdomTree Japan Hedged Equity Index. At the close of
trading on November 30, "the WisdomTree Japan Hedged Equity Index
will be adding a geographic revenue filter to remove companies
that derive the bulk of their revenue from Japan. As a result,
the WisdomTree Japan Hedged Equity Index will allocate more
weight and exposure to Japan-based multinational companies that
we believe stand to benefit more from a weakening yen relative to
the U.S. dollar,"
Schwartz said in the note
Companies that derive more than 80 percent of their revenue
from Japan will be excluded from the index. The ETF will also cap
sector allocations at 25 percent. By employing the geographic
revenue screen, DXJ's top-10 holdings could be dramatically
altered, though WisdomTree noted that the ETF's new lineup will
not be known until the screen is run on November 30.
Beyond the obvious lower dependence on Japan for the bulk of
revenue, DXJ's new lineup could also sport a negative correlation
to the yen over all relevant time periods, providing investors
with the desired hedge effect.
"After the Japan revenue filter is applied, we believe the
WisdomTree Japan Hedged Equity Index will become more exposed to
sectors with revenues outside Japan," wrote Schwartz.
WisdomTree has previously employed a similar strategy in
revamping established members of its product lineup. Earlier this
year, the WisdomTree Europe Hedged Equity Fund (NYSE:
) was altered. In the process, HEDJ's exposure to risky
European financial services firms
was slashed while the fund's exposure to dividend-paying firms
that derive more than 50 percent of their sales from outside of
Europe was increased.
HEDJ has gained three percent since early September when the
changes took effect.
For more on currency hedged
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