WisdomTree’s DXJ Gets Export Tilt

By
November 19, 2012
Share:

Related ETFs

Ticker Fund name
DXJWisdomTree Japan Hedged Equity
Related ETF Lists
Asia-Pacific ETFs, Japan ETFs

WisdomTree makes what amounts to a yen-weakening bet by tweaking its Japan fund’s DXJ’s index.

WisdomTree is tinkering with the index that underlies the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) to increase the fund’s exposure to firms that capture much of their revenue stream from export sales.

The new tilt toward heavy exporters, effective after the close on Nov. 30, reflects the firm’s growing belief that a pro-quantitative-easing Prime Minister Shinzo Abe might be elected in the next few weeks. He aims to end what have been two-plus decades of deflation policies exacerbated by the strength of the yen.

Indeed, the Japanese yen has already started to lose ground against the U.S. dollar—a trend that is beneficial to Japanese exporting companies. But DXJ’s portfolio currently has among its top holdings names that derive all of their revenues from Japan.

The move is predicated on a body of data suggesting that a weaker yen is quite positive for Japan’s huge export sector. DXJ insulates investors from yen movements, but gives investors pure access to thriving sales of Japanese firms.

The new “geographic revenue filter”—designed to remove from the index companies that generate most of their revenues from Japan, is an interesting nod to the notion that even passive investing is affected by active insight. DXJ does indeed track a rules-based WisdomTree index, but the firm is now changing the rules based on its perception of the market.

“We believe Japan-based multinational companies that generate the bulk of their revenues from markets outside of Japan are more likely to benefit from a weakening yen,” WisdomTree’s Jeremy Schwartz said in a research note.

“We reviewed the index holdings for the WisdomTree Japan Hedged Equity Index and believe the current, unadjusted dividend-weighted methodology is overly exposed to companies whose revenues are generated within Japan, and under exposure to Japanese multinationals,” he said.

Firms that derive more than 80 percent of their revenues from Japan will now be excluded from the mix.

The New Portfolio

Individual securities will be capped at 5 percent and sectors at 25 percent, for risk management purposes.

Under the new methodology, Mitsubishi UFJ Financial Group will become the largest portfolio holding, representing 5 percent of the mix, up from a 3 percent weighting previously. Some 71 percent of the firm’s revenues are generated in Japan.

Takeda and Canon will now be No. 2 and No. 3 holdings, with weighting of 5 percent and 4.5 percent, respectively, up from 2.6 percent and 2.1 percent previously. In all, revenue generated from Japan for the top 10 holdings will average 41 percent, down from 73 percent under the current methodology.

DXJ’s top holdings will also show equity returns that have greater negative correlation to the yen, Schwartz said in the note.

Bumped from the top are NTT DOCOMO and Nippon Telegraph & Telephone Corp., two names that generate all of their revenues from Japanese saless.

 

ETF.COM CHANNELS

Trying to figure out alternatives ETFs? Use our alternatives ETFs channel, library and ETF screener!

Want to learn more about smart-beta ETFs? Check out our smart-beta guide, essentials library and ETF screener!

ETF DAILY DATA

'JNK' and 'BSV' led ETF creations Friday, Aug. 28, as investors piled into fixed-income ETFs at the expense of equity funds.

'QQQ' and 'SPLV' paced Invesco PowerShares' issuer-leading outflows Friday, Aug. 28, as total U.S.-listed ETF assets hit $2.039 trillion.

ETF.COM ANALYST BLOGS

By Dave Nadig

With many ETFs currently trading well off fair value, what’s an ETF investor to do? Don’t panic.

By Matt Hougan

Out-of-favor funds can bring attractive returns.

By Matt Hougan

New data from Charles Schwab show that the death of mutual funds is happening faster than we thought.

By Dave Nadig

Grab the popcorn. Precidian just doubled-down on its nontransparent active ETF proposal with the SEC this morning.

ETF INDUSTRY PERSPECTIVE

By John Del Vecchio

An index that goes long financially sound companies and shorts the ones with problematic balance sheets.

By Dan Draper

The nature of retirement is changing. How can investors adapt?

By Invesco PowerShares

A more in-depth look at the smart-beta survey's results.