Japan ETFs

Small-cap Japan exchange traded funds are slated to benefit the most from the Japanese economic recovery and a turnaround in the Nikkei. Many of the Japanese small-cap companies are focused on domestic growth rather than export industries.

“After the rally for the past six months, it’s only natural to see some correction,” said Hisashi Osezawa, chief executive of Tokyo-based J-Flag. “In the long run, small-cap stocks that are more dependent on the domestic market would benefit from an economic recovery.”

The Nikkai 225 Stock Average has plummeted 16% from May 22. The drop was measured from its peak seen last September 28, 2012 when Prime Minister Shinzo Abe took office and promised economic reform for the ailing country. The Bank of Japan was also set to end 15 years of a deflationary cycle, reports Bei Hu for Bloomberg. [Yen ETF Rallies Nearly 3% as BOJ Holds Steady]

“A big part of the rally in the equity market in Japan has been in small- to mid-caps,” Hong Kong-based Gottschalk said. “Some of them may have become too expensive. If there’s any market volatility, liquidity will dry up so the small-cap market will potentially have more risk on the downside.”

The benchmark Nikkei 255 Index was up 1.9% Friday after plunging 6.4% Thursday, the largest decline in three weeks. Despite the latest sell-off in Japanese equities, mostly due to hedge funds selling positions, focused ETFs have still been performing decently. The WisdomTree Japan SmallCap Dividend Fund (NYSEArca: DFJ) gained 3.87% last week, while the iShares MSCI Japan Japan SmallCap Index Fund (NYSEArca: SCJ) gained 4.12% over the same time period. Both ETFs were among the best-performing non-leveraged ETFs for the week. [Why Retail Investors Still Like Japan ETFs]