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3 Top Ranked Hedged Japan ETFs in Focus - ETF News And Commentary

Japan saw a choppy 2014, with its economy slipping into a technical recession in Q2 and Q3 on a hike in the consumer tax rate from 5% to 8% in April along with weak wage growth that wrecked havoc on consumer spending.

However, every cloud has a silver lining. Following downbeat economic data, the Central Bank enhanced its asset buying program to 80 trillion yen a year in October end from the previous rate of 60-70 trillion yen and hoped for a quick turnaround.

To add to this, Prime Minister Shinzo Abe agreed to a delay in another consumption tax hike from 8% to 10%, which was slated for October 2015. Plus, Shinzo Abe has won a snap election, gaining nine seats in the Diet.

All the pro-growth changes paid off and pulled Asia's second-largest economy out of the recession in the final quarter of the year. Its economy grew 0.6% in Q4, though it fell shy of market expectations on weak private consumption gains.

Private consumption, making up about 60% of the economy, rose only 0.3%, pointing to a lingering impact of April's sales tax hike. Stocks responded positively to this economic growth and touched the seven-year peak.

Are Japanese Stocks Rising Stars?

In fact, the Japanese stocks maintained their ascent reaching a 15-year high on February 18 as export growth in Japan grew at the best clip in over a year in January. Also, the release of the Fed minutes which indicated no hurry for rates hikes due to stronger greenback and an unsteady Euro zone cheered investors.

As per the data by Wall Street Journal, several Japanese big wheels touched multi-year highs. Last November, WisdomTree discussed in a note that 'corporate profits in Japan are more important than GDP growth' as Japanese earnings have skyrocketed 526% cumulatively from October 1994 to October 2014 while its average economic growth was negative 0.17% during this phase.

As per WisdomTree, Japan is the sole key developed region (considering the U.S., Europe and broader MSCI EAFE Index markets) which has witnessed a reduction in its price-to-earnings (P/E) ratios ever since the drastic policy easing and structural reforms - popularly known as "Abenomics"- started, while the U.S., Europe and EAFE saw P/E multiples advance 23%, 22% and 14%, respectively (read: Four Reasons to Buy WisdomTree ETFs ).

However, the massive stimulus program has devalued the Japanese currency to its multi-year low relative to the greenback. This was more so in the backdrop of a stronger U.S. dollar. Consequently, investors seeking a Japanese flavor in their portfolio might consider investing in hedged equity ETFs.

Though the un-hedged ETF iShares MSCI Japan Index Fund ( EWJ ) has added more gains than the hedged versions of broader equities ETFs so far this year with the yen trading subtly higher on a safe-haven bid, hedged versions should be prudent bets on Japan for the medium-to-long term. EWJ - a Zacks ETF Rank #2 (Buy) - is up 7.9% so far this year (as of February 18, 2015).

While the space sees quite a large number of hedged equity ETFs, a look at the three top-ranked ETFs in the Japan equity space would be the best way to capture the uptrend (read: As Dollar Continues to Strengthen, Time for Hedged Currency ETFs? ).

Wisdomtree Japan Hedged EquityFund (DXJ)

DXJ looks to offer investors a way to gain exposure to Japanese shares devoid of currency risks. This is a liquid choice in the space with 6,000,000 shares in average trading volume a day. The large-cap oriented fund has a huge asset base of $13.3 billion and charges 48 bps in fees (see DXJ vs. DBJP: Which is the Better Hedged Japan ETF? ).

Toyota Motor (5.71%), Mitsubishi (4.97%) and Canon (3.78%) take the top three spots of the fund while consumer discretionary (25.3%) and industrials (21.1%) are top two sectors.

The fund is up 6.6% so far this year while it has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.

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

DBJP is a bit overlooked choice in the space with only $736 million in AUM and about 250,000 shares in average volume. The fund charges 50 bps in annual fees. The product holds 315 stocks in total. Top three holdings include the surging Toyota (6.5%), Mitsubishi (2.8%) and Softbank (2.1%). DBJP is also up 6.6% YTD. The fund has a Zacks ETF Rank #1 with a Medium risk outlook.

Currency Hedged MSCI Japan ETF ( HEWJ )

This fund looks to track the MSCI Japan 100% Hedged to USD Index, before fees and expenses. The fund gives exposure to the un-hedged EWJ, and then mitigates exposure to fluctuations between the value of the yen against the dollar (read: Invest in Japan with This Top Ranked Hedged ETF ).

The product has so far managed assets of about $236 million. Its daily volume level has been moderate at 300,000 shares a day, suggesting that the bid/ask spread is relatively tight and total costs will not come in much higher than the 48 bps expense ratio.

The fund has added about 6.9% in the year-to-date frame (as of February 18, 2015). HEWJ has a Zacks ETF Rank #2 with a Medium risk outlook.

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WISDMTR-J HEF (DXJ): ETF Research Reports

DEUTS-XT MS JPN (DBJP): ETF Research Reports

ISHA-CH MS JAP (HEWJ): 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.


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

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