What next for the Fed? Talk around the financial water cooler suggests markets may pull off a “soft landing.” However, that doesn’t mean the Fed and Chair Jerome Powell are done with rate hikes. Powell has signaled a July Fed rate hike, yes, but that can actually be a benefit to Japan ETFs like DXJ. The Japan ETF’s use of currency hedging positions it to benefit from a growing rate gap between the U.S. and Japan.
DXJ, the WisdomTree Japan Hedged Equity Fund, launched in 2006 and has a long-term pedigree as an ETF. Having sat above $15 billion in ETF AUM nearly a decade ago, the strategy is seeing its AUM rise once again. It has added $800 million in the last three months alone. Pairing that with its performance intrigues as well.
The Japan ETF has outperformed its ETF Database Category and FactSet Segment averages over the last five and three years. It has also outperformed over one year and YTD, returning 27.8% based on the latter metric. So why might a rate hike in the U.S. keep pushing a Japan ETF forward?
DXJ can benefit from a growing gap between the Federal Funds Rate and Japan’s interest rate. That difference, the “carry effect,” already provided a return of 5.4% as of mid-May. With the Fed looking to raise rates yet again, that could lift the carry effect payout even further. Add in the diversification benefits of looking abroad for a new ETF, and a July rate hike doesn’t have to be all bad news.
Wrapping it all up, DXJ also benefits from a strong tech chart. Its price sits at $82.34, above both its 50 and 200-day Simple Moving Averages (SMAs) as of Tuesday. For those investors looking for ways to play a July Fed rate hike, DXJ merits consideration.
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