The Japanese equities and related exchange traded funds have outperformed, but some financial advisors and fund managers believe the market still has more room to run.
The iShares MSCI Japan ETF (NYSEArca: EWJ) increased 15.1% year-to-date. Meanwhile the Nikkei stock index gained about 18%.
Nevertheless, Arne Espe, senior portfolio manager at USAA Investments, argues that the government’s efforts to jump-start its economy through monetary easing, along with good earnings-growth projects, make the Japanese market attractive, reports Daisy Maxey for the Wall Street Journal. Consequently, USAA Investments is overweight Japan relative to its benchmark, including a 5% position in Japanese stock index-index futures and 5% in shorting the yen. [Japan Stocks, ETFs’ Outperformance Only Getting Started]
“For me, the investment play is thinking the yen will go down in value, which has positive implications for equities,” Espe told the WSJ.
The CurrencyShares Japanese Yen Trust (NYSEArca: FXY), which tracks yen movements against the dollar, declined 3.4% year-to-date. The yen currency is currently trading around 123.7 to the U.S. dollar.
While the yen may be negative for foreign investors – a depreciating yen weighs on USD-denominated returns, the weaker yen is a positive Japanese exporters.
Alternatively, traders can utilize the ProShares UltraShort Yen (NYSEArca: YCS), which tries to reflect the daily -2x or -200% daily return of the USD/JPY currency pair, to hedge further price depreciation in the yen currency. YCS rose 5.4% so far this year.
Investors can also utilize currency-hedged ETF options to track a growing Japan with worrying about a depreciating yen. The WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ), which hedges against a depreciating yen currency, gained 16.9% so far this year. Additionally, the yen-hedged iShares Currency Hedged MSCI Japan ETF (NYSEArca: HEWJ) increased 18.5% and Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP) advanced 18.4%.