Investing in Japan has been very lucrative this year.
'Abenomics' - a reformative initiative introduced by the Prime
Minister Shinzo Abe early this year is largely the reason for this
boost in optimism.
The Bank of Japan follows a policy to increase Japan's monetary
base at an annual run of about 60-70 trillion yen. This injection
of liquidity will continue until the inflation target reaches 2%.
This bond buying kept a lid on Japan Government bonds rates for the
near term, but according to BOJ Governor Kuroda, interest rates
will likely take an upturn once BOJ attains 2% inflation target and
stops buying bonds.
The inflation rate in Japan was recorded at
in October 2013 which showed a steady improvement since May when it
recorded a deflationary rate of 0.3%. Amid such a backdrop,
WisdomTree has brought a new Japan-based investment option -
WisdomTree Japan Interest Rate Strategy Fund
JGBB - to benefit from potential interest rate changes in Japan and
a weakening of yen.
JGBB in Focus
This newly launched fund looks to track the WisdomTree Japan
Interest Rate Strategy Index. The Index consists of long positions
in the U.S. treasury bills having a remaining maturity of greater
than one month and less than three months and short positions in
JGB (maturing 5 to 10 years) futures contracts thus providing
exposure to changes in Japanese interest rates (read:
3 Covered Call ETFs to Pump Up Your Income
As far as asset allocation goes, the fund has 76.58% exposure in
Japanese rates and 23.42% Japanese currency contracts. US
treasuries get 99.05% asset allocation. The fund charges 50
bps in annual fees.
How Does it Fit in the Portfolio?
As far as short-term bonds are concerned, these offer less
vulnerability to interest rate fluctuations. As of December
20, 1-month treasury yield was
while the 3-month treasury yield was at 0.07%. These rates were
unchanged from before the beginning of the taper talk (read:
3 Income ETFs to Watch Ahead of Key Fed Meeting
Thus, the fund completely rules out the rising rate concerns
through its extremely short duration. Also, the Fed has promised to
keep the key interest rate low for longer, thus giving another
round of assurance to short-term Treasury bond holders.
Coming to the fund's JGB exposure, a rise in inflation might
stimulate the Japanese economy which in turn might push up the
longer-term Japanese interest rates leading to slump in bond
Japanese inflation expectations are presently averaging 1.5% per
year while bond yields are hovering around the all-time low. Hence,
inflation-adjusted real yields have entered the negative territory.
Quite expectedly, bondholders will eventually demand higher yields
which in turn put pressure on bond prices. Thus, a bearish
stance in Japanese interest rates will likely cushion investors
from bond price losses.
The third agenda is the declining Yen. With the Fed taper already
taking place and the BOJ's stimulus still in place, Yen will likely
lose more strength relative to the greenback in the coming days.
JGBB really does not face any competition. While there are plenty
of funds in the long-short space including
ProShares Credit Suisse 130/30 (
PowerShares S&P 500 BuyWrite Portfolio (
, these don't offer Japanese exposure.
Thus, we expect JGBB to have a clear road ahead. The fact can also
be validated by its AUM number. Within just two days of the launch
the fund accumulated $5 million in assets suggesting that there
might be some interest in this product by Japan-focused investors.
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PRO-LC CORE PLS (CSM): ETF Research Reports
WISDMTR-JP IRSF (JGBB): ETF Research Reports
PWRSH-SP5 BUYWR (PBP): ETF Research Reports
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