Japan ETFs Could Deliver More Gains in 2024 | ETF Trends

The MSCI Japan Index returned 20.3% last year, underscoring that outside the U.S., Japan was the star performer among equity markets in major developed economies.

Some of the related ETFs far exceeded that performance. For example, the WisdomTree Japan Hedged Equity ETF (DXJ) returned 42% in 2023. Asking for that performance to be replicated this year may be a tad demanding. But it’s also clear that Japanese equities, including DXJ holdings, are a catalyst-rich asset class.

Even if Japanese equities settle back to absorb the market’s advance last year, conditions are ripe for further gains for U.S. investors, according to analysts. In 2023, the Nikkei 225′s jump was eroded by the yen’s slide. The Morningstar Japan Index returned 27.9% in yen terms and 19.7% in U.S. dollar terms,” noted Morningstar’s Leslie Norton.

This Time Could Be Different

The phrase “this time could be different” isn’t solid investment advice. And it’s been known to vex investors. However, there are legitimate reasons to believe that it could be true for Japanese equities and DXJ.

“Investors have been burned by false dawns in Japan before. Consider that the Nikkei 225 stands at 35,619, below the all-time high of 38,957 that it set in December 1989. Yet analysts say that this time is different. Credit goes to a market energized by reforms focused on building a more robust equity culture, a reversal out of deflation, a competitive currency, and a changing society,” added Norton.

Tailwinds for DXJ

Among the tailwinds for DXJ and Japanese stocks are valuations that still rank among the lowest in the developed world despite last year’s massive rally and the increasing commitment of Japanese companies to shareholder rewards.

Examining the latter point, Japanese corporations are under pressure from securities regulators to boost dividends and buybacks. Additionally, activist investors are exuding similar pressure on long-stingy firms in the Land of the Rising Sun.

Activists and regulators compelling companies to increase dividends and repurchase programs is, on the surface, attractive. However, savvy investors know it’s crucial that companies deploying shareholder rewards have the financial strength to support those endeavors. In the case of DXJ, it appears plenty of the ETF’s member firms can increase payouts and buybacks and do so over the long term.

“Japanese companies have net cash. According to AllianceBernstein, companies representing 53.5% of Japan’s market capitalization had a net cash position on their balance sheets at the end of 2022, compared with 39.4% in the U.S. and 22.8% in the Eurozone,” concluded Norton. “For Topix, net cash accounted for 19.2% of market value, compared with 6.8% in Europe and 3.6% for SPX.”

For more news, information, and analysis, visit the Modern Alpha Channel.