Check Out This Leveraged Japan ETF
July 15th at 9:00am by Tom Lydon
Excluding the U.S. and Japan, developed market equities have, for the most part, have been mediocre performers. Investors have plenty of options among ETFs with which to play rising U.S. equity markets. In terms of Japan, the dominant plays are the WisdomTree Japan Hedge Equity Fund (NYSEArca: DXJ) and the iShares MSCI Japan ETF (NYSEArca: EWJ).
Not only are DXJ and EWJ the top-two asset-gathering ETFs in the U.S. this year, the pair also rank among the best performers. That is to say plenty of investors have benefited from Prime Minister Shinzo Abe’s efforts to weaken the yen and reinvigorate the world’s third-largest economy. [Bearish Yen Forecast Could be Bullish for DXJ]
Obviously, Japanese investors are benefiting as well with the Nikkei 225 being one of the top-performing benchmark indexes in the world this year. U.S. investors looking to get close to tracking the Nikkei can opt for the MAXIS Nikkei 225 Index ETF (NYSEArca: NKY). [Election Could be Next Catalyst for Japan ETFs]
DXJ, EWJ and NKY are U.S.-listed options that trade while most Japanese investors are asleep, but even with that simple fact in mind, the ETF many investors in the land of the rising sun have embraced can be considered an interesting choice. Interesting for the risk-tolerant that is. That fund is the NEXT Funds Nikkei 225 Leveraged Index ETF, which is issued by Nomura Asset Management and trades in Tokyo with the ticker 1570, according to the fund’s fact sheet.
More interesting is that trading activity in the NEXT Funds Nikkei 225 Leveraged Index ETF has surged almost 1,160% this year while activity in the broader Topix is up a mere 17%, according to Zero Hedge. Leveraged ETFs, not matter what country they are listed in, come with an array of well-documented issues, including higher fees and the potential for significant tracking error, that makes the products best suited for active traders not buy-and-hold investors.
One school of thought its that leveraged ETFs are best left for use by professionals, but as Zero Hedge notes, 28% of activity on Japanese exchanges currently comes from retail investors.
And like other leveraged ETFs, it is easy to see why the double-leveraged Nikkei 225 Leveraged Index ETF has caught the attention of investors. In mid-January, the ETF was trading around 5,550 yen, but by the time Nikkei peaked in May, the fund traded as high as 11,550 yen, according to Bloomberg data. Underscoring the risks associated with these products, the leveraged Nikkei ETF tumbled by roughly 4,500 yen from May 22 to June 13. The fund has since rebound to a Friday close of 9,490 yen.
U.S. investors have not warmed to the idea of leveraged Japan ETFs the way their Japanese counterparts have. The ProShares Ultra MSCI Japan (NYSEArca: EZJ), which is up 38.3% year-to-date, has average daily volume of just over 45,000 shares and had just $22.1 million in assets under management at the end of the first quarter, according to ProShares data.
ProShares Ultra MSCI Japan
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of DXJ.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.