Big Upside for Small Cap Japan ETF

Some of the more impressive performances by non-U.S. developed market exchange traded funds in recent months have come courtesy of Japan funds.

A declining yen has lifted the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) and the db X-trackers MSCI Japan Hedged Equity Fund (NYSEArca: DBJP) to gains north of 9% apiece over the past three months.

In weak yen/strong Japanese stocks scenario, small-caps should not be ignored. The WisdomTree Japan Hedged Small Cap Fund (NasdaqGM: DXJS) is proving as much with a 90-day gain of 8.5%. Over the same period, the iShares Russell 2000 ETF (NYSEArca: IWM) is up just 0.7%. [Global Small-Caps Shine as U.S. Rivals Falter]

“We believe that small-cap Japanese stocks may offer greater sensitivity to the local economy. And the evidence is encouraging: small caps are currently outperforming their more global brethren in the large-cap space. Thus, we believe that fears about Japan’s consumption tax hike derailing Japan’s local economy are misplaced, since small caps are much more heavily dependent on actual Japanese consumption,” said WisdomTree Associate Research Director Chris Gannatti in a note out Wednesday.

Japanese small-caps are often overlooked by U.S. investors that are more familiar with the likes of Honda (NYSE: HMC) and Toyota (NYSE: TM), but DXJS has earned its place in the Japan ETF conversation. The ETF, which celebrates its first anniversary on Saturday, has accumulated $84.7 million in assets, a number that could easily grow as tactical investors look for ways to exploit Prime Minister Shinzo Abe’s efforts to stimulate domestic growth in the world’s third-largest economy. [Opportunity With Japanese Small-Caps]

The leverage of DXJS to Japan’s domestic recovery combines by way of a combined 37.3% weight to the consumer discretionary and consumer staples sectors.