How To Join Japan Rally With DXJ, Other ETFs

March 08, 2013

When it comes to tapping into Japan's recovery, investors have plenty of tools to choose from.


The flood of assets finding their way into the WisdomTree Japan Hedged Equity ETF (NYSEArca: DXJ)—and into other Japan-focused ETFs—are a testament to growing investor confidence that Shinzo Abe's government, hand in hand with the Bank of Japan, will succeed in bringing Japan's economy out of its 20-plus-year deflationary doldrums.

Nearly $2 billion of new net assets has flowed into DXJ in the past month alone, in what has been a steep trajectory to the upside for an ETF that started 2013 with around $1 billion and now boasts more than $4.3 billion in assets. DXJ's momentum particularly picked up after WisdomTree changed the ETF's indexing methodology in November to emphasize companies with big export profiles—the very kinds of firms that stand to benefit the most from a weakening yen.

DXJ has in a way become the poster child for the Japanese recovery under Abe's command. Investors who jumped on the DXJ bandwagon seem to have struck gold. The fund has rallied more than 36.5 percent since mid-November, benefiting not only from rising stocks but peeling out the crumbling yen from its returns. By comparison, the S&P 500 has gained some 13.7 percent in the same period.

DXJ is an equities fund that hedges its exposure to the yen by shorting yen futures and forward-contracts. That mechanism allows DXJ to serve up purer access to Japanese equities than, say, the veteran in the space, the $6.2 billion iShares MSCI Japan Index Fund (NYSEArca: EWJ).

EWJ, too, however, has rallied significantly, tagging on gains of some 20.2 percent since mid-November as its portfolio of Japanese equities rallied and investors poured some $1.6 billion into the ETF, but the fund, by design, misses out on the weakening of the yen—the stronger dollar shaves off investor returns.

If the yen were to rise, EWJ would be sitting pretty—as would other equity plays such as State Street's pair of SPDR Japan funds, "JPP" and "JSC," to name a few—and many argue that the yen might be nearing oversold territory, but that remains to be seen.

DXJ Not Only Game In Town

When it comes to tapping Japan, DXJ has become a fan favorite, but it's certainly not the only tool investors have.

From a fundamental perspective, since the prime minister took office in December, the Bank of Japan has already committed to double its inflation target to 2 percent and agreed to support an asset-buying program that could reach $1 trillion this year.

While the BOJ, holding a two-day meeting that ended yesterday, is not expected to roll out any new stimulus measures under the leadership of Governor Masaaki Shirakawa, Abe's nominee to replace Shirakawa—Asian Development Bank President Haruhiko Kuroda—is reportedly a fierce advocate of quantitative easing (QE), and is expected to implement aggressive measures once he takes office this spring.

That's to say analysts and economists, by and large, are betting on Japan's ability to pull off this recovery, with many saying that the Japanese stock market still has a long way to go if it's to revisit highs seen so many years ago. The Nikkei 225, the broad Japanese stock index, is on its way—it has risen more than 38 percent since mid-November, breaking through 12,000 to this week hit its highest level since September 2008.


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