The biggest story in ETFs so far this year is the soaring popularity of WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ), which investors are using to invest in Japanese stocks while sidestepping a falling yen.
DXJ is the best-selling ETF in 2013 by a wide margin with net inflows of $3.6 billion. This is incredible demand for an ETF that now holds total assets of $5.3 billion. [Japan ETFs Rake in Cash as Yen Weakens]
The WisdomTree ETF’s currency hedging strategy has protected it from a declining Japanese yen. Therefore, it has outperformed rivals that don’t hedge their currency exposure, such as iShares MSCI Japan (NYSEArca: EWJ). Conversely, when the yen strengthens against the dollar, then the WisdomTree ETF will lag EWJ and other unhedged funds.
DXJ also tilts its portfolio toward exporters, which WisdomTree thinks will benefit more from a depreciating yen. In late 2012, the ETF implemented an index methodology change designed to add multinational companies that generate more revenue from global markets rather than the local Japanese market. For example, companies that derive more than 80% of their revenue from Japan are excluded from the index. [ETF for Higher Japanese Stocks and a Weaker Yen]
“We believe the BOJ supports bold action to potentially reverse Japan’s long-term deflationary trend, manifesting primarily in a weaker currency,” said Jeremy Schwartz, director of research at WisdomTree.
Last week, Haruhiko Kuroda was approved as the new governor of the Bank of Japan.