Japan ETFs Still Have Winning Potential | ETF Trends

In 2023, Japan was essentially the only major developed market to somewhat keep pace with the S&P 500 in terms of sheer performance.

Depending on an investor’s instrument of choice, it was — perhaps surprisingly — possible to beat U.S. stocks via Japan. For example, the WisdomTree Japan Hedged Equity ETF (DXJ) surged 42% last year. That easily bested the 26% returned by the S&P 500.

The fund also reiterated to investors that there are clear advantages at the intersection of currency hedging and Japan equity exposure. Last year, DXJ beat the unhedged MSCI Japan Index by a margin of more than 2-to-1. Still, the 2023 for the MSCI Japan Index was solid compared to other developed market equity gauges. That sparked concern about the ability of Japanese equities to replicate that strength in 2024. A month and a half into the new year, it appears those concerns are overblown.

DXJ Could Do It Again in 2024

This year isn’t yet two months old, but Japanese stocks are already showing signs of strength. The MSCI Japan Index was higher by 4.4% year to date as of February 12. But DXJ was far more impressive, as highlighted by a 12.2% gain. That was more than double the returns offered by the S&P 500 over the same span.

There are solid fundamental reasons that could support more upside for DXJ as 2024 moves along. For example, Japan is emerging from a decades-long bout with deflation. Additionally, international equities remain important portfolio diversifiers. Those benefits are enhanced when the diversifiers generate upside.

Not only is Japan’s policy position different from the rest of the world, which has been in an inflationary environment with expectations for higher-for-longer interest rates, but the Japanese stock market also is a diversification play,” according to BlackRock.

Another issue to consider — and it’s onesome investors in the U.S. may not be familiar with — is Japan  is overhauling its tax-savings plan, which previously made it more attractive for citizens there to hoard cash rather than risk assets. As cash becomes less appealing to Japanese investors, they could move that capital into higher-growth assets, such as equities.

“The shift is meaningful considering the decades-long preference for cash and the magnitude of flows (with cash piles estimated at trillions of yen) that could make their way to Japanese equities,” added BlackRock.

Further supporting the case for Japanese stocks and DXJ is a renewed emphasis by Japanese firms on corporate efficiency. They’re shedding lagging units, and some are using the capital generated to bolster shareholder rewards.

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