U.S. small-caps can be important parts of properly diversified equity portfolios, but the drawbacks to this asset class can include lofty valuations and volatility.
Another developed market, that being Japan, could offer investors exciting potential with smaller stocks, particularly if the dollar continues soaring.
Bank of Japan Governor Haruhiko Kuroda also commented on hits readiness to ease monetary policy even further at Jackson Hole, Bloomberg reports. Markets are widely anticipating that the Federal Reserve will boost interest rates in December, which would likely prop up the dollar while pressuring the yen.
SEE MORE: Dollar ETFs may Finally get Their Day
Plenty of exchange traded funds offer investors exposure to Japanese small-caps, including the WisdomTree Japan SmallCap Dividend Fund (NYSEArca: DFJ), iShares MSCI Japan Small-Cap ETF (NYSEArca: SCJ) and the SPDR Russell/Nomura Small Cap Japan ETF (NYSEArca: JSC).
The WisdomTree Japan Hedged Small Cap Fund (NasdaqGM: DXJS) is a currency hedged play on smaller Japanese equities.
“One reason is simply that small-company stocks generally outperform large-company ones over long time periods, a phenomenon documented as early as 35 years ago in the U.S. by researcher Rolf Banz. The trend is alive and well in Japan, where since the end of 1999, small-caps have outperformed during 75% of rolling three-year periods and 85% of rolling five-year ones,” reports Jack Hough for Barron’s.
[related_stories]Market observers argue that the greenback will maintain its momentum as more traders anticipate the Federal Reserve to hike interest rates 25 basis points in December, especially after minutes from the Fed’s September policy meeting released on Wednesday revealed many members leaning toward higher borrowing costs on improving U.S. economic conditions.
SEE MORE: Hedged Japan ETFs to Capitalize Off Additional Stimulus
Some Abe advisors have said the Bank of Japan and the government could combine further monetary easing with more public spending, the Wall Street Journal reports. The central bank holds over a third of outstanding government debt.
“There’s another reason to like Japanese small-caps now: They’re reasonably priced. As of the end of August, Glover calculated that they traded at a 16% discount to Japan’s large-caps and a 39% discount to U.S. large-caps relative to earnings. They were less than half as expensive as U.S. small-caps,” according to Barron’s.
For more information on Japan, visit our Japan category.
WisdomTree Japan SmallCap Dividend Fund (NYSEArca: DFJ)
