As Abenomics continues to gain traction and Prime Minister Abe makes more progress on his growth strategy for Japan (the “third arrow” of Abenomics), I believe there will be a continual evaluation of the stocks and sectors most primed to benefit from the new government initiatives.
1. Reflation: The stocks included as part of the reflation theme most often include financials and real estate.
2. Abe’s Growth Strategy: There are many areas of Abenomics, but two sectors in particular—health care and technology—have the potential to be beneficiaries of government initiatives to increase economic growth.
3. Yen Sensitivity: The stocks of exporters, such as capital goods companies, have been some of the most sensitive to changes in the yen’s exchange rate.
Below I focus on the methodology and construction for these new indexes.
Investment Process for WisdomTree Japan Sector Indexes
The WisdomTree Japan Sector Indexes use a rules-based process for selecting and weighting securities while hedging exposure to the yen.
• Selection Rules
o Eligible Universe: Tokyo & JASDAQ stock exchanges
o Market Cap Requirements: Minimum float-adjusted market capitalization1 of US$500 million
o Liquidity Requirements (all criteria measured as of Index screening date):
• 3-month average daily volume of at least $100,000
• Calculated volume factor (3-month average daily volume/weight in Index) greater than $200 million
• At least 250,000 shares traded or a notional value of shares traded of $25 million for each of the last six months
• Weighting Rules
o Weighting: Float-adjusted market capitalization
o Holding Caps: At Index rebalance dates, individual security weights are capped at 10%2. Between annual Index rebalances, individual security weights may fluctuate above 10% due to market movement.
o Liquidity Adjustment: If a security has a calculated volume factor of less than $400 million, its weight will be reduced proportionally by a liquidity factor that equals the original calculated volume factor/$400 million.
• Mechanics of the Currency Hedge
o Hedged Equity Return = Local Market Equity Return + Yen Return – Hedged Yen Return
Below I highlight key facets of the exposures for each Japan Sector Index to provide insight into some of the primary factors that might influence how these Indexes perform.
Top 5 Industry Exposures for the Japan Sector Indexes
For definitions of Indexes in the chart, please see the Glossary.