New Japan ETF A Standout Among Giants

March 21, 2016

The Global X Scientific Beta Japan (SCIJ) is a smart-beta take on Japan’s total equity market, and one that’s not even a year old yet. Still, this young—small—fund, with less than $12 million in assets, is delivering an impressive performance relative to the giants in the space.

Year-to-date, when compared with competing funds such as the $10.4 billion WisdomTree Japan Hedged Equity (DXJ | B-66) and the $17.6 billion iShares MSCI Japan (EWJ | B-97), SCIJ is avoiding much of the downside the segment has seen this year as Japan’s Nikkei 225 slipped some 11% since Jan. 1.

The Multifactor Approach

SCIJ is a multifactor fund that invests in Japan’s 500 largest stocks. The fund picks its securities based on value, size, low volatility and momentum. These factors are measured by price-to-book ratio, free-float market capitalization, historical volatility over a two-year period, and one-year-minus-one-month total returns, respectively.

The holdings are then weighted in the portfolio based—again—on a multifactor approach that strives to diversify risk.

SCIJ is one of the newcomers in a quickly growing pocket of multifactor ETFs competing in the smart-beta universe.

In 2015, everyone from iShares to Deutsche Asset Management to newcomers such as Goldman Sachs and John Hancock launched multifactor funds. In all, there were nearly 40 new launches of multifactor ETFs (strategies with three or more targeted factors), amounting to roughly 14% of all ETF launches in one year. The pioneer of sorts in this budding segment was the State Street lineup of Quality Mix funds, the first of which popped up in 2014.

In essence, their main claim is to provide investors with a better risk/return profile over time, and greater factor diversification. In a multifactor approach, when one factor isn’t performing well, another one might, smoothing out what could otherwise be a bumpy ride in a single-factor strategy.

SCIJ and other multifactor funds look to hone in on factors that have a track record of outperforming market-cap-weighted strategies. And since inception, SCIJ has delivered just that.

From its launch on May 12, 2015 to date, SCIJ has slipped 1.2%, while EWJ is down 10% in the same period. DXJ is down nearly twice that, with a 19% loss—a far steeper decline associated to the strengthening of the yen against the dollar in the period.

Charts courtesy of StockCharts.com

Cost Matters

SCIJ may be outperforming, but investors can’t ignore cost. When it comes to fees, SCIJ isn’t all that cheap to own.

With an expense ratio of 0.38%, it’s in theory cheaper than EWJ and DXJ at 0.48%. But when trading costs are added, SCIJ’s total cost of ownership rises significantly.

SCIJ trades with an average spread of 0.34%, which means investors who own it are shelling out roughly 0.72% in expenses a year, or $72 per $10,000 invested.

EWJ’s average trading spread is only 0.09%, and DXJ’s is a negligible 0.02%. That puts the total cost of ownership for these funds at $56 and $50 per $10,000 invested, respectively.

EWJ trades roughly $620 million a day, on average, while DXJ’s average daily volume sits at $349 million. The new-to-market SCIJ sees less than $7,000 in average daily volume. Since it came to market, it has received $10 million in net inflows.

Contact Cinthia Murphy at [email protected].

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