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.
WisdomTree has developed five new Japan Sector Indexes designed to be primary beta benchmarks for some of the major investment themes stemming from Abenomics:
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
Sector Characteristics
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.