ETF Trends
ETF Trends

Attractive valuations and political stability may help draw global investors to Japanese markets, supporting Japan country-specific exchange traded funds.

“Foreign institutional investors are rushing to buy Japanese stocks given that Japan is politically stable and that the stocks are cheaper than others, so they will be a buy for a while,” Nomura Chief Executive Koji Nagai told the Wall Street Journal.

According to the Tokyo Stock Exchange, purchases by foreign investors of Tokyo Stock Exchange First Section stocks outpaced sales in value terms in both November and December.

Japanese stocks have made a quick rebound in recent weeks, with the Nikkei Stock Average at 19145.14 at Thursday’s close, or a little higher than its closing price of 19033.71 at the end of 2015. Japanese equities have been hit earlier this year on concerns over the Chinese economy and a decline in oil prices. Meanwhile, Bank of Japan’s negative interest rate policy dragged on financial sector stocks as narrowing margins hurt banks’ profitability.

However, many of these concerns are dissipating, with oil prices recovering and Japanese Government Bond yields recently breaking above positive territory.

Investors who are interested in gaining exposure to this segment of the global market have a number of ETF options to choose from, with currency-hedged strategies currently outperforming as the Japanese yen depreciating against the U.S. dollar.

The WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ), iShares Currency Hedged MSCI Japan ETF (NYSEArca: HEWJ) and Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP) have been go-to options to access Japanese equities markets while hedging against foreign exchange risks, but potential investors should keep in mind that the funds could underperform non-hedged funds if the yen strengthens.

Moreover, investors may also consider hedged ETFs that track the more recently launched JPX-Nikkei 400 Index. The JPX-Nikkei 400 Index was launched in January 2014 as a means of reinvigorating the Japanese equity market. The Index employs a rigorous screening process based on return on equity, cumulative operating profit and market capitalization to  select high-quality, capital-efficient Japanese companies. As part of the Abe administration’s revitalization plan, the BOJ and large state funds have steered away from conservative bets for riskier equity exposure, including ETFs that track customized benchmarks like the JPX-Nikkei 400 Index.

U.S. ETF investors can also track the benchmark index through relatively new offerings, including the Deutsche X-trackers Japan JPX-Nikkei 400 Hedged Equity ETF (NYSEArca: JPNH) and iShares Currency Hedged JPX-Nikkei 400 ETF (NYSEArca: HJPX).

Alternatively, if you still have an uncertain outlook on the Japanese yen and U.S. dollar, an ETF investor may consider alternative options that take a more neutral view on foreign currency movements. For instance, IndexIQ has a handful of 50% hedged/50% unhedged option, including the IQ 50 Percent Hedged FTSE Japan ETF (NYS Arca: HFXJ).

ETF investors may also look to some relatively new dynamic or adaptive currency-hedged international stock strategies. For instance, BlackRock offers the iShares Adaptive Currency Hedged MSCI Japan ETF (BATS: DEWJ), which may shift from a 0% unhedged currency exposure to a 100% fully hedged, depending on differences in interest rates, relative valuations, currency momentum and currency volatility.

WisdomTree also offers the WisdomTree Dynamic Currency Hedged Japan Equity Fund (BATS: DDJP), which hedge currency fluctuations in the relative value of the foreign currency against the USD, ranging from 0% to 100% hedge based on interest rate differentials, valuations and relative price momentum of the foreign currencies compared to the USD.

For more information on the Japanese markets, visit our Japan category.