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Japan ETFs Surging, Is the Country Back on Track?

DXJ EWJ

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Japan easily has one of largest financial markets in the world and has undoubtedly been one of the most interesting stories across the investing landscape over the past 10 months. The country was long thought to be stuck in a malaise, though with the election of Shinzo Abe in December, Japanese stock markets began to take off, while the yen plunged.

Troubled times

For a while in 2013, Japan was the best performing major market, posting gains in excess of 80% in a six month period. However, this did not last as Japanese stocks have since crumbled, losing over 22% since the end of May, though they have since rebounded a little (see Inside the Crash in Japan ETFs).

“There’s no clear direction in the market at all,” said Isao Kubo, a Tokyo-based equity strategist at Nissay Asset Management Corp., which oversees about $61 billion. “I think you can be bullish on the Japanese market, but shares have risen fast recently and investors may be being cautious.”

The path ahead for Japan

Despite the slump in the Japanese markets, investors have seen a surge in interest for this space. A recent boost in the Asian stock markets has led to a recovery in Japanese stocks.

In fact, on Jul 10, the Nikkei rose 0.4% to 14,472.58, after opening 1.0% lower on the back of the yen's surge against the dollar. Index heavyweight Fast Retailing gained 1.8% and buoyed the benchmark, according to a recent Reuters article.

Furthermore, the Bank of Japan maintained its positive outlook on the economy, which has been driven by aggressive monetary and fiscal stimulus, citing a full recovery for the first time since the earthquake in 2011.

Abe’s efforts to implement economic reforms resulted in a flourishing Japanese commercial property market. Sales of logistics, retail space and offices soared as high as 70% in the first five months of 2013. Japan REITs witnessed good numbers ever since Abe stepped into office and are expected to sell about 900 billion yen of shares by the end of this year (read Play a Resurgent Japan with These ETFs).

It appears that aggressive expansionary measures taken by the Abe government, including “unlimited” easing in order to weaken the currency, make exports competitive and pull the country out of its deflationary spiral, are delivering results. Japan’s GDP grew at an annualized rate of 3.5% during the first quarter of 2013, up sharply from 1% growth recorded during the previous quarter and substantially stronger than estimates.  

Possible choices for investors

Given this solid growth, some brave investors may want to consider investing in Japan with ETFs at this time. While there are a number of options in the space, we have highlighted two of the most popular choices below, either of which could be intriguing for Japan ETF investors:

WISDOMTREE JAPAN HEDGED EQUITY FUND (AMEX:(DXJ - ETF report)

Launched in Jun 2006, DXJ tracks the Wisdom Tree Japan Hedged Equity Index and provides exposure to Japan’s equity markets but hedges the currency risk. The large blend fund has an asset base of $10.5 billion and charges 48bps in fees.

With a total of 214 holdings in its basket, its top 10 stocks contribute 38% of the total assets. DXJ has a focus on bigger stocks, as 62% are in large caps and 32% are in mid caps. The ETF has posted good returns of 21.8% as of Jun 30 in the YTD period.

Furthermore the fund has a decent yield of 1.02% and has an average daily trade of 4.4 million shares a day. DXJ currently has a Zacks Rank of ‘3’ or Hold (see all the Top Ranked ETFs).

ISHARES MSCI JAPAN ETF (AMEX:(EWJ - ETF report)

Launched in Mar 1996, EWJ seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the MSCI Japan Index. It is a large blend fund and has an AUM of $11.4 billion and charges 50 bps in fees.

The fund has a total of 314 stocks in its basket, and the top 10 stocks contribute 24% to the total. EWJ has a large cap focus, putting 61% in large caps and then 37% in mid caps.

It has posted returns of 13.7% as of Jun 30 for the YTD period. The fund has a decent yield of 1.33% and has an average daily trade of more than 40.6 million shares a day.  EWJ currently has a Zacks Rank of ‘3’ or Hold.

The Bottom Line

Although there has been some extreme volatility as of late in Japan, shares finally appear to be back on track. Stocks in the country have rebounded nicely and are trending back towards highs (also read Is NKY A Better Japan ETF?).

This trend could definitely continue if Japanese growth levels hold up and the current high rate of growth isn’t an aberration. If this takes place, the aforementioned Japanese ETFs might make for solid, but probably volatile, picks for investors in today’s rather rocky foreign market environment.

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