The Nikkei 225, Japan's benchmark equity index, has surged
almost nine percent in the past month as investors have bought into
the notion that newly elected Prime Minister Shinzo Abe could
actually prove successful in weakening the yen.
The yen, already on pace to be the worst-performing developed
market currency in the world this year, is hovering near 21-month
lows against the dollar and multi-month lows against the euro,
Australian dollar and other major currencies as Abe continues to
sharpen his currency-weakening rhetoric. A cornerstone of his
campaign, Abe has demanded that the Bank of Japan engage in
unlimited monetary easing and target inflation of two percent,
double the central bank's current goal.
Showing he is not one to pull any punches, Abe has said that if
BoJ does not get in line with his easing and inflation demands, he
will work to revoke a Japanese law guaranteeing the central bank's
independence. Abe has also threatened to remove BoJ governors that
do not see things his way.
The headlines are a welcome respite from nearly two decades of
spiraling equity prices, deflation, rising deficits and assorted
other black marks that have plagued Japan, the world's
third-largest economy. Since its debut in April 1996, the iShares
MSCI Japan Index Fund (NYSE:
) has lost almost 41 percent, painting the picture of just how
perilous investing in Japan has been.
With that type of savage decline in mind, it is understandable
that some investors will take a "show me" attitude when it comes to
Japan. It is logical to ask how and why things will be different
under Abe this time around (this is his second go round as Japan's
prime minister). Assuming Abe is successful in restoring lost glory
to Japan's economy, these are the
with which to play that theme.
Precidian MAXIS Nikkei 225 Index ETF (NYSE:
) Most ETF industry observers would say it is hard for a firm to be
successful with just one fund on the market, but the MAXIS Nikkei
225 Index ETF has proven to be a success for Precidian as the fund
just crossed the $200 million in assets under
NKY is an easy to comprehend ETF. What this fund amounts to is a
tracking ETF for the Nikkei 225. That means with a 24.4 percent
weight to industrial firms and a 15.4 allocation to technology
companies, NKY is heavily exposed to Japanese exporters. Should
Abe's yen-weakening efforts prove fruitful, NKY will be one of the
more desirable destinations among Japan ETFs.
Investors should note that NKY is not perfect in terms of
tracking the Nikkei 225. For example, since Abe won on December 16,
the Nikkei 225 is up about 4.1 percent while NKY has added about
2.5 percent. On the other hand, it is worth noting that NKY has
gained 11.3 percent in the past year compared to an 8.5 percent
jump for EWJ.
SPDR Russell/Nomura PRIME Japan ETF (NYSE:
) Due to the fact that is has just $14.55 million in AUM and
average daily volume of just 3,200 shares, the SPDR Russell/Nomura
PRIME Japan ETF is likely to turn off lovers of superficial ETF
metrics. Still, there is no getting around the fact that the fund
is up 5.4 percent in the past month.
JPP employs what is known as a sampling strategy. That means the
ETF is not home to every stock in its underlying index. In this
case, JPP is home to
391 of its index's 1,000 components
and its overall lineup is very similar to EWJ's.
Industrial and technology names combine for 34 percent of JPP's
weight and Japanese auto giants Toyota (NYSE:
), Mitsubishi and Honda (NYSE:
) are JPP's top three holdings. Combine that with the fact that JPP
does not offer a currency hedge and JPP is another fund could build
on recent gains if Abe is successful in suppressing the yen's
WisdomTree Japan Hedged Equity Fund (NYSE:
) Speaking of yen hedges, the WisdomTree Japan Hedged Equity Fund
does offer a hedge on USD/JPY fluctuations, but that has not held
the ETF as the yen has plunged in recent weeks. Quite the opposite
is true as DXJ has surged 8.83 percent in the past month. Said
another way, DXJ has outperformed the ProShares UltraShort Yen
), a double-leveraged play on the yen against the dollar.
Earlier this month, DXJ's underlying index began employing a
designed to remove companies that derive the bulk
of their revenue from Japan
. Interestingly, DXJ was already on the move higher before that
filter was introduced. Over the past 90 days, DXJ has jumped 14.5
To put that move into context, combing the returns offered by
the major South Korea and Thailand ETFs over the same time horizon
would still result in a number that lags DXJ's returns.
Bottom line: DXJ is attractive because Japanese firms that are
heavily dependent on their home nation to drive top-line growth,
particularly if they run capital-intensive businesses that used
imported raw materials. A weaker yen is good Japan's exporters, not
so much for the importers, and DXJ capitalizes on that theme.
For more on Japan and ETFs, click
(c) 2012 Benzinga.com. Benzinga does not provide investment advice.
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