Japan ETFs For A Yen Rout
Investors looking to play yen weakness directly without equity exposure can short the CurrencyShares Japanese Yen Trust (NYSEArca: FXY) or go long the ProShares UltraShort Yen ETF (NYSEArca: YCS).
I prefer shorting FXY over going long YCS, since I’m more of a long-term bear on the yen. With interest rates near zero in Japan, FXY hasn’t paid dividends, so short-sellers haven’t been on the hook for any payouts due the actual owners of the shares that have been borrowed for shorting.
Plus, not only do leveraged products have a negative compounding effect over the long haul, YCS is structured as a commodities pool, as it gains its exposure using futures contracts.
This means mark-to-market tax consequences every year, whether you sell or not—and K-1 forms. Not for me, thanks; I like to keep my taxes simple.
But to each his own. Some investors don’t care about K-1s and would prefer YCS’ tax-rate benefits. Specifically, 60 percent of its capital gains or losses are taxed as long term, while 40 percent are taxed as short term. In comparison, all of FXY’s gains are taxed as ordinary income for FXY.
If the LDP takes control next month and the BoJ goes all-in the way Swiss National Bank did in its efforts to weaken the Swiss franc, things should get interesting in Japan.
But investors need to keep a few things in mind. On numerous occasions, the yen has been pummeled on speculation of more action from the BoJ, only to surge once again after the shorts were disappointed by a smaller-than-expected stimulus announcement.
If the U.S. “fiscal cliff” situation worsens, or the eurozone debt crisis rears its ugly head again, the BoJ may have to fight some strong market forces pushing the yen stronger, as investors pile back into the yen as a safe-haven currency.
That’s ironic, to say the least, since Japan’s debt-to-GDP ratio, currently well over 200 percent, is higher than any nation in the world, even higher than Greece. That said, comparing an industrial powerhouse like Japan to Greece is more than a little inappropriate.
In any case, the recent announcements point to a real possibility for some structural changes in Japan’s monetary policy in the coming year.
The good news is that there are plenty of ETF products in which you can take advantage of further yen weakness in such a scenario.
At the time this article was written, the author held a long position in DXJ and a short position in FXY. Contact Dennis Hudachek at firstname.lastname@example.org.
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