Market signals come in all shapes and sizes, but at VettaFi, advisor engagement is a leading indicator — and right now, that data is putting the spotlight on currency-hedged Japan ETFs. While bank ETF engagement spikes might make sense, currency-hedged Japanese equities are somewhat of a surprise in terms of the most popular ETFs for advisors, with the iShares Currency Hedged MSCI Japan ETF (HEWJ) and the WisdomTree Japan Hedged Equity Fund (DXJ) benefitting.
HEWJ has seen an 868% increase to advisor engagement on a month-over-month (MoM) basis, up there among bank strategies like the SPDR S&P Bank ETF (KBE) and the iShares U.S. Financials ETF (IYF). DXJ, too, saw a big spike at 38% in research volume. That may actually be a more impressive jump despite the smaller percentage, given that DXJ already sees much more research interest and advisor engagement as a common proxy for currency-hedged Japanese equity exposures among ETFs.
Why the spike in interest for currency-hedged Japan ETFs? Well, there could be a few reasons. For one thing, advisors may ask themselves what the big challenge for the U.S. market is right now, and it’s a big differentiator: inflation. While Japan’s inflation rate is one of the lowest among all major nations, inflation in the U.S. has been stubbornly unwilling to slow down despite the Fed’s best efforts.
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That presents an appealing equity opportunity, especially as factors like earnings, reopening demand for Japanese imports in China, and even wages boost the overall picture in Japan. But it’s the currency factor that helps set the DXJs and HEWJs of the world apart from, say, a non-currency hedged strategy like the iShares MSCI Japan ETF (EWJ).
By hedging out the impact of the yen, and how it changes compared to the U.S. dollar, DXJ, for example, offers a pure-play approach to the performance of Japanese stocks. DXJ has outperformed HEWJ and the Xtrackers MSCI Japan Hedged Equity ETF (DBJP) on a YTD basis, charging 48 basis points (bps) to track the WisdomTree Japan Hedged Equity UCITS Index, compared to 50 bps for HEWJ.
While past performance doesn’t guarantee future returns, Japan’s exposure to China’s ongoing reopening and its steady-as-she-goes economic policy present currency-hedged Japan ETFs as an intriguing play. With the U.S. economy facing all sorts of challenges, ETFs like DXJ may be worth watching as we enter the second quarter of the year.
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