Time May Be Right To Reconsider Japan ETFs

July 13, 2016

Japanese equities, whether offered in currency-hedged or unhedged ETFs, have been largely unpopular this year.

The two largest funds in the segment, the iShares MSCI Japan ETF (EWJ | B-93) and the WisdomTree Japan Hedged Equity Fund (DXJ | B-62), have seen net outflows of $4 billion and $5 billion year-to-date, respectively, and are among 2016’s biggest ETF redemptions.

It wasn’t that long ago that everyone wanted in on a rosy outlook for Japan under Shinzo Abe’s leadership. But economic reforms and momentum in Japan seemed to have stalled, and in recent months, many investors trimmed their exposure to Japan.

This week, following the latest election there that reinforced Abe’s leadership by giving his coalition majority in Japan’s upper house, Japanese equities have been rallying sharply—possibly offering a boost to investor confidence.

Expanded Stimulus Program Coming

Abe himself was reported saying he would “use his victory to push forward with his economic reform program,” according to CNN. In fact, he was already looking to expand stimulus spending, and in a meeting with former Fed Chairman Ben Bernanke on Monday, he said he wants to “be steadfast in accelerating our breakaway from deflation," according to Bloomberg.

In the past two days following the election, DXJ and EWJ have soared, as the chart below shows. The yen, meanwhile, has given up ground—as measured by the CurrencyShares Japanese Yen Trust (FXY | B-99)—offering DXJ an extra boost relative to its unhedged counterpart.

The recent action amounts to a complete change in trajectory to what had been thus far a difficult year for these funds, particularly DXJ. The ETF had faced steep losses in recent months as Japan’s economy disappointed and the yen strengthened. Consider the year-to-date chart below: 

Charts courtesy StockCharts.com

 

If you are among the investors who have trimmed exposure to Japan or altogether bailed on that market this year, should you get back in? And if so, should you opt for a currency-hedged exposure as opposed to unhedged?

The answer really boils down to your own personal investing goals. Still, we asked three ETF strategists whether it makes sense to own Japanese equities right now, and what to do about that exposure to the yen ...

 

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