More to Come for Yen Hedged ETFs

October 23rd at 9:00am by Tom Lydon

The hedged currency exchange traded fund movement continues to gain steam, but investors may not want to get too frustrated with the currency that initially put the spotlight on these ETFs: The yen.

After touching a four-and-a-half year low at 103.73 in late May, the yen has gained over 5% against the U.S. dollar. Doubts regarding the efficacy of Abenomics conspired with a variety of macro factors, including the recent U.S. government shutdown, to send currency traders rushing to the yen as a safe-haven alternative to the dollar.

Still, since May 31, the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ), 2013 top asset-gathering ETF, is up nearly 5%. The db X-trackers MSCI Japan Hedged Equity Fund (NYSEArca: DBJP) is up 8.1% over the same time. [Yen Hedged ETFs Rally as Nikkei Soars]

So successful have DXJ and DBJP been that the rising yen did not deter the debut of DXJ’s small-cap cousin, the WisdomTree Japan Hedged SmallCap Equity Fund (NasdaqGS: DXJS). DXJS debuted in late June and is already up 8.1% with over $17 million in assets under management.

A combination of all three funds merits attention going forward. Macquarie expects USD/JPY at 105 over the next six months while Goldman Sachs sees USD/JPY at 103 in six months and 125 in 2016, according to CNBC.

There are also some expectations that the Bank of Japan, which is already purchasing $70 billion worth of Japanese government bonds per month, could up that figure early next year, further depressing the yen in the process. [Japan ETF's Chart Shows Promise]

Adding to the longer-term allure of ETFs like DBJP and DXJ is looming Federal Reserve tapering. At this point, it appears market participants are expecting tapering to arrive late in the first quarter of 2014. The U.S. “is likely to taper in 2014 and may even completely halt asset purchases by the end of next year. If the Fed does so, Japanese corporate profits would benefit from the lower exchange rate caused by a stronger dollar,” according to Market Realist.

Earlier this month, Koichi Hamada, an adviser to Japanese Prime Minister Shinzo Abe, expressed concern that the nomination of Janet Yellen to succeed Ben Bernanke as Fed chief would lead to further USD/JPY weakness (yen strength). An end to U.S. easy money and more of that policy from BoJ would alleviate that concern and likely bolster Japan ETFs in the process.

WisdomTree Japan Hedged Equity ETF

 

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.