The Q4 Japan ETF Trade

Many investors historically have rotated into Japanese equities at year-end. But only one Japan ETF is seeing benefits. 

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Reviewed by: Lara Crigger
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Edited by: Lara Crigger

Over the past few years, a curious trade has emerged.

At or around the beginning of the fourth quarter, which starts Oct. 1, investors begin to pile into Japanese equities, as represented by the $17 billion iShares MSCI Japan ETF (EWJ). However, by February of the subsequent year, many of those investors pull their money out again:

 

Sources: FactSet, ETF.com; data range: Jan. 1, 2016 to Oct. 16, 2018

 

Now this Q4 trade is once again appearing in EWJ, which, over the past week, has brought in $767 million in new net investment assets, the second-highest inflows for any ETF this week. In fact, EWJ has brought in $1.3 billion in new money in the two weeks since Q4 2018 began:

 

Sources: ETF.com, FactSet; data as of Oct. 16, 2018

 

Flows Slow Into BBJP, DXJ

Intriguingly, however, the other 30 Japan ETFs aren't seeing the same kind of flows.

Even the JPMorgan BetaBuilders Japan ETF (BBJP), which made a splash earlier this year by topping $1 billion in assets roughly one month after launch, has only seen modest inflows since Oct. 1. The fund has gained $104 million in two weeks, with most days seeing no new money at all:

 

Sources: ETF.com, FactSet; data as of Oct. 16, 2018

 

That's not altogether surprising, as flows into BBJP, which now has $1.96 billion in assets under management, have slowed considerably since the fund's wild summer ride. Since Aug. 1, BBJP has only brought in $275 million in new net money, compared with $1.7 billion the six weeks prior (read: "Wall St. Whale Makes ETF Splash").

Since the start of Q4, flows into other major Japan ETFs have been even more modest than those of BBJP. The $240 million Franklin FTSE Japan ETF (FLJP), the next nearest competitor to EWJ and BBJP, has not seen any new money enter since September.   

Neither has currency hedging appealed to investors: The $5.4 billion WisdomTree Japan Hedged Equity Fund (DXJ) and $1.1 billion iShares Currency Hedged MSCI Japan ETF (HEWJ) have seen only $111 million and $10 million in inflows, respectively, since Oct. 1.

Sticking With What You Know

So far, at least, it appears that investors making this in-and-out trade are sticking with what they know: EWJ. Both BBJP and FLJP are newer funds, after all.

What's more, EWJ offers unparalleled liquidity, with a spread of 0.02% and $494 million traded daily. In contrast, BBJP has a spread of 0.07% and trades on average $10.4 million daily. That's not bad, but EWJ is clearly on a different liquidity level.

Given that this trade appears to last only as long as the fourth quarter does, it makes intuitive sense that investors would opt for the most liquid vehicle in the market to enact it.

BBJP, however, is proving to be more of a buy-and-hold instrument: It hasn't had a single day of outflows since it launched in June.

Contact Lara Crigger at [email protected]

Lara Crigger is a former staff writer for etf.com and ETF Report.