ETFs tracking Japanese stocks have been solid performers this year as investors are racing to ex-US developed market equity funds.
For example, the iShares MSCI Japan ETF (NYSEArca: EWJ), the largest Japan ETF, is up 18% year-to-date.
EWJ has delivered a solid performance even in the face of the U.S. dollar slumping and the yen being solid. Japanese stocks are usually adversely affected by a stronger yen due to the economy’s high dependence on exports. Importantly, Japanese stocks are attractively valued relative to other developed markets.
EWJ and rival Japan ETFs could be tested by the Oct. 22nd snap election, which many market observers believe will be won by Prime Minister Shinzo Abe. EWJ has recently seen an uptick in options activity ahead of that election.
“Specifically, on Friday, traders apparently bought to open weekly 10/27 57.50-strike calls, which saw the biggest open interest change over the weekend, with more than 12,600 contracts added. By purchasing the calls to open, the buyers expect EWJ shares to continue their trek north of $57.50 through Oct. 27, which encompasses the aforementioned Oct. 22 election,” according to Schaeffer’s Investment Research.
Japanese equities also show more attractive valuations, compared to the pricier U.S. markers. For instance, EWJ shows a 15.42 price-to-earnings and a 1.2 price-to-book, whereas the S&P 500 index is trading at a 18.9 P/E and a 2.6 P/B.
“The recent appetite for EWJ calls runs counter to the trend seen on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), where speculators have bought to open more than four puts for every call on the ETF during the past two weeks. Going out 10 weeks, the fund’s 50-day put/call volume ratio sits at a lofty 6.09 — higher than about four-fifths of the past year’s readings,” according to Schaeffer’s.
Related: As USD Strengthens, Currency Hedged ETFs Require a Second Look
Investors have added $159.5 million to EWJ since the start of the fourth quarter, but the ETF has lost over $1 billion year-to-date.
The iShares Currency Hedged MSCI Japan ETF (NYSEArca: HEWJ) and Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP) are among the other well-known Japan ETFs for investors to consider. Both are currency hedged and could surge if the yen weakens against the U.S. dollar.
For more information on the Japanese market, visit our Japan category.