WisdomTree's currency-hedged ETF focused on Japanese equities
looks set to keep running upward now that Japan's new government
launched a $116 billion monetary stimulus package aimed at creating
jobs, weakening the yen and ending the deflation that has dogged
the world's No. 3 economy for nearly 25 years.
The WisdomTree Japan Hedged Equity Fund (NYSEArca:DXJ) has
already had an impressive run since it became clear that Shinzo
Abe-a politician focused on expanding the Bank of Japan's
yen-weakening quantitative easing-would become prime minister of
Japan last year.
The ETF, which takes the dollar-yen currency cross out of
returns, has gained 13 percent in the past month, compared with 5.4
percent for the iShares MSCI Japan Index Fund (NYSEArca:EWJ)-the
difference being the yen's 7.4 percent slide against the dollar in
the period. Recent flows into DXJ suggest investors understand
Abe's plan to urge the BOJ into buying more Japanese government
bonds in the hopes of driving down borrowing rates and the value of
the yen is part of a general "race to debase" between
developed-world central banks since the crash of 2008 involving the
Federal Reserve, the European Central Bank and the BOJ.
That said, the entire economic stimulus and currency-weakening
pursuit, aimed at creating 600,000 jobs and pumping up growth by 2
percentage points, looks quite different from Japan's perspective,
to the extent that it has been in and out of recession since its
real estate market crashed in 1990, ushering in an entire era of
low growth and deflation.
Moreover, the new QE initiative will dramatically lift Japan's
debt, which is already at an anxiety-provoking level of more than
200 percent of its entire budget. Some analysts wonder if doubling
down is the right decision, and that, in turn, has planted seeds of
doubt as to whether Japan will actually follow through.
"Investors have been burned time and time again betting on a low
in Japanese equities, but the recent developments in Japan, Abe's
plans to battle deflation, and the strong yen are some of the most
aggressive we've seen," IndexUniverse ETF analyst Dennis Hudachek
Climbing On The Currency-Hedged Train
While EWJ is a far bigger fund than DXJ, with $5.5 billion in
assets compared with DXJ's $1.4 billion, that gap is narrowing-and
with dramatic speed.
Since rumblings of an Abe victory started coursing through
financial markets in October and early November, DXJ started raking
in assets. The fund ended the third quarter of last year with just
under $550 million in assets, but it pulled in more than that in
the fourth quarter, ending the year with $1.22 billion in
DXJ's momentum particularly picked up after WisdomTree changed
the ETF's indexing methodology at the end of November to emphasize
companies with big export profiles-the very kinds of firms that
stand to benefit the most from a weakening yen.
Prior to this "geographic revenue filter" that went into effect
on Nov. 30, the fund had among its top holdings names that derived
all of their revenues domestically.
The methodology has clearly paid off.
Since Nov. 30, the fund has attracted net inflows of more than
$673.5 million in new investor dollars-which includes $236.7
million so far in 2013. The yen has weakened by about 12 percent in
the past three months.
What's interesting to note is that a competing ETF sponsored by
Deutsche Bank that also takes dollar-yen currency fluctuations off
the table isn't gaining any of the traction that DXJ is in terms of
asset growth. Since Nov. 30, net flows into the fund remain at
It's all the more surprising because the db-X MSCI Japan
Currency-Hedged Equity ETF (NYSEArca:DBJP) is a variation on the
MSCI index the huge $5 billion iShares Japan ETF, EWJ, tracks. In
theory, that makes DBJP a perfect complement to EWJ.
The problem, at least in part, is that DBJP remains a tiny fund,
with just $5.3 million in assets, which means it trades very little
and investors will have trouble getting executions when they buy
and sell the ETF.
Still, like DXJ, DBJP too has also seen gains of 12 percent in
the past month, benefiting from the currency hedge.
Perhaps it's a matter of being timing:DXJ was first to market in
the world of currency-hedged Japan
. It launched in June 2006-almost five years before Deutsche Bank
brought DBJP to market.
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