Japan ETF Play Of 2013 Hardly Out Of Gas

September 23, 2014

Reports of the death of the currency-hedged Japan trade may be premature.

There’s a new meme running through the investment sphere, and it goes like this:

A strong dollar is great and all, except that it’s going to collapse the world’s economies, so you might want to rethink that hedged-equity trade.

That’s the focus of a few articles this week on the Web, so I thought I’d check-in on the Japan trade I wrote about earlier this month. Back then, the yen was flat for the year, so the benefits of a hedged-Japan strategy really weren’t evident. Here’s how the last month has been, however:


Yen Movements

In the last four weeks, the yen has fallen almost 5 percent. That slow decline has meant that, in dollar terms, any investment in Japan has been muted. That’s what the black line in the chart—the iShares MSCI Japan ETF (EWJ | B-97)—would suggest.

The actual local market, as measured by the red line of the Deutsche X-trackers MSCI Japan Hedged Equity ETF (DBJP | B-71) is actually up about 3 percent for the trailing month. And as expected, the exporter/dividend-heavy version of Japan proffered by the WisdomTree Japan Hedged Equity (DXJ | B-62), the blue line, is doing even better, up by nearly 4 percent.

So to put it bluntly, I don’t see this trade being “played out” in any way. This latest round of Abenomics is actually just getting started, and it’s doing exactly what investors should expect it to do: pressuring the yen downward, and boosting the local stock market.

I can already read the emails from the future, however: “But Dave, where’s my monster 2013 return!?”


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