ETF Trends
ETF Trends

With some recent help from the Bank of Japan and Japan’s Government Pension Investment Fund, exchange traded funds with exposure to Japanese stocks have again been getting long looks from investors.

Since the start of the fourth quarter, the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) and the iShares MSCI Japan ETF (NYSEArca: EWJ) have each hauled in more than $1.2 billion in new assets. The iShares Currency Hedged MSCI Japan ETF (NYSEArca: HEWJ) has added over $200 million in assets this quarter, going from afterthought to one of the most successful new ETFs to debut in 2014. [Stimulus Stokes Inflows to Japan ETFs]

The Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP) has added nearly $240 million of its almost $629 million in assets under management this year, but even with those robust inflows to Japan ETFs, data indicate investors are under-allocated to Japanese stocks.

“Some have described Japan as a crowded trade, in that many investors were already “all-in” in 2013 with strong inflows of $150 billion in terms of foreign investor purchases. However, our review of the U.S. mutual fund data—based on funds that offer information about country allocations—shows that money managers are still under-weight Japan compared to more passive foreign indexes that allocate based on market capitalizations,” said WisdomTree Research Director Jeremy Schwartz in a new research note.

That said, assets under management at U.S.-listed Japan ETFs have been on the rise for several years. “Since December 2011, total assets in Japanese dedicated equity funds in the ETF and open-ended space grew from $8.35 billion to $30.95 billion in September 2014,” said Schwartz.

ETFs have led the way for U.S.-listed Japan funds growth. Of that $30.59 billion, $26.59 billion is allocated to ETFs, up from $6.33 billion in December 2011, according to WisdomTree data.

Although Japan, the world’s third-largest economy, recently entered its second recession in two years, the weak yen and some of the lowest valuations in the developed world could compel money managers to boost allocations to Japan ETFs.

Since 1974, the long-term price-to-book ratio between Japanese and U.S. stocks is around 1.2, but even with a dip below 0.75 since 1991, Japanese stocks are currently deeply discounted compared to U.S. counterparts, according to BlackRock data published earlier this month. [Value in Japan ETFs]

If fund managers decided to remove their underweight positions on Japanese stocks, the already rapidly growing DXJ, DBJP and others could easily grow some more.

“If the managers we tracked removed their under-weight position, this would imply additional inflow of approximately $31 billion to Japanese equities. To put this in perspective, this is approximately one-third the total assets in the ETF foreign large-cap category within the U.S.,” according to Schwartz.

WisdomTree Japan Hedged Equity Fund