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Currency-Hedged ETFs Lead Japan's Stock Market Rally
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The Japan stock market has been on an astounding rally this year, with the Nikkei 225 Stock Average hitting the highest level since July 1990 and Topix benchmark reaching its highest since Aug 1, 1990.
A slew of robust corporate earnings, foreign buying, steady BOJ policy, a weaker yen and increased buybacks have boosted investors’ sentiment in Japan’s stocks, with most analysts turning bullish on the world’s third-largest economy. U.S. debt-ceiling deal and higher-than-expected GDP growth have added to the strength. While most of Japan ETFs have been on the rise this year, currency-hedged funds are leading the space.
These include WisdomTree Japan Hedged Equity Fund (DXJ - Free Report) , Xtrackers MSCI Japan Hedged Equity ETF (DBJP - Free Report) , iShares Currency Hedged MSCI Japan ETF (HEWJ - Free Report) , Franklin FTSE Japan Hedged ETF (FLJH - Free Report) and WisdomTree Japan Hedged SmallCap Equity Fund (DXJS - Free Report) . All these funds have a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
Currency-hedged ETFs are outperforming their unhedged peers as the surging U.S. dollar is knocking down the returns of international investments. This is because a strong greenback eats away foreign investment gains when repatriated in U.S. dollar terms, pushing them into the red even when international stocks are performing well. As such, the strength in the greenback has compelled investors to flock to currency-hedged ETFs (see: all Developed Asia-Pacific ETFs here).
Solid Trends
The Nikkei 225 Stock Average is Asia’s best-performing major benchmark for 2023. The outperformance is expected to continue as the economy has rebounded strongly after fully reopening in the second half of last year. Both business and service activities are growing this year thanks to the strength in consumer spending and the reopening of borders.
Japan’s economy expanded at a faster pace than initially estimated as businesses ramped up spending. GDP grew at an annualized 2.7% in the first quarter, up from the initial reading of 1.6% growth. Bank of Japan is maintaining its accommodative policy stance and expects inflation to ease in the second half of this year. A weaker yen is boosting sentiment in the exporter-heavy market, driving the rally in Japan’s stocks.
Strategists at Goldman Sachs cited solid fundamentals and expectations for structural changes that “justify a bullish stance” on the nation’s equities. Factors including an inbound recovery, plans for robust capital expenditure and the ongoing monetary easing at the Bank of Japan have brightened the economic outlook for Japan. In addition, companies are announcing solid earnings, valuations are cheap and long-term investors are positioned in the market, per a Goldman analyst (read: ETFs to Tap the Surge in Japan Stocks).
According to John Vail, chief global strategist at Nikko Asset Management Co., domestic and foreign investors are optimistic about Japan relative to the United States and Europe, as it does not face an imminent recession and yet has very low valuations. Fabiana Fedeli, chief investment officer for equities and multi assets at M&G Plc, believes that Japan’s stocks have more room to run. “Companies in Japan were improving their balance sheets and were giving back to shareholders in terms of buybacks and dividends,” Fabiana Fedeli cited.
According to a report by Reuters, hedge funds sold European stocks last week to invest in stocks in the United States and Japan. These funds have taken the largest bullish position in Japanese stocks seen in about two years.
ETFs In Focus
WisdomTree Japan Hedged Equity Fund (DXJ - Free Report) – Up 26.4%
With AUM of $2 billion, WisdomTree Japan Hedged Equity Fund seeks to provide exposure to the Japanese equity market while hedging exposure to fluctuations between the U.S. dollar and the yen. It targets the Japanese equity stock market without the currency risk by tracking the WisdomTree Japan Hedged Equity Index.
Xtrackers MSCI Japan Hedged Equity ETF (DBJP - Free Report) – Up 26.2%
Xtrackers MSCI Japan Hedged Equity ETF tracks the MSCI Japan U.S. Dollar Hedged Index, which is designed to provide exposure to Japanese equity markets, while at the same time mitigating exposure to fluctuations between the value of the U.S. dollar and Japanese yen. With AUM of $316 million, Xtrackers MSCI Japan Hedged Equity ETF trades in an average daily volume of 28,000 shares and charges 45 bps in fees per year.
iShares Currency Hedged MSCI Japan ETF (HEWJ - Free Report) – Up 25.8%
This is a hedged version of the popular fund iShares MSCI Japan ETF (EWJ - Free Report) . It offers broad exposure to a wide range of Japanese companies that may potentially benefit from Japan's stimulus policies while mitigating exposure to fluctuations between the value of the Japanese yen and the U.S. dollar.
iShares Currency Hedged MSCI Japan ETF has amassed nearly $156.2 million in its asset base and sees volume of about 100,000 shares a day. It charges 50 bps in fees per year from investors.
Franklin FTSE Japan Hedged ETF (FLJH - Free Report) – Up 25.1%
Franklin FTSE Japan Hedged ETF provides access to the Japanese stock market and seeks to reduce the impact of the yen relative to the U.S. dollar. It comes at a low cost with expense ratio of 0.09%.
Franklin FTSE Japan Hedged ETF has accumulated $14.9 million in its asset base while trading in an average daily volume of 100,000 shares.
WisdomTree Japan Hedged SmallCap Equity Fund (DXJS - Free Report) – Up 18.6%
With AUM of $25.7 million, WisdomTree Japan Hedged SmallCap Equity Fund offers exposure to the small-cap segment of Japan’s equity market while hedging exposure to fluctuations between the U.S. dollar and the yen. It follows the WisdomTree Japan Hedged SmallCap Equity Index.
WisdomTree Japan Hedged SmallCap Equity Fund trades in solid volume of 7,000 shares per day and charges 58 bps in annual fees.
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Currency-Hedged ETFs Lead Japan's Stock Market Rally
The Japan stock market has been on an astounding rally this year, with the Nikkei 225 Stock Average hitting the highest level since July 1990 and Topix benchmark reaching its highest since Aug 1, 1990.
A slew of robust corporate earnings, foreign buying, steady BOJ policy, a weaker yen and increased buybacks have boosted investors’ sentiment in Japan’s stocks, with most analysts turning bullish on the world’s third-largest economy. U.S. debt-ceiling deal and higher-than-expected GDP growth have added to the strength. While most of Japan ETFs have been on the rise this year, currency-hedged funds are leading the space.
These include WisdomTree Japan Hedged Equity Fund (DXJ - Free Report) , Xtrackers MSCI Japan Hedged Equity ETF (DBJP - Free Report) , iShares Currency Hedged MSCI Japan ETF (HEWJ - Free Report) , Franklin FTSE Japan Hedged ETF (FLJH - Free Report) and WisdomTree Japan Hedged SmallCap Equity Fund (DXJS - Free Report) . All these funds have a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
Currency-hedged ETFs are outperforming their unhedged peers as the surging U.S. dollar is knocking down the returns of international investments. This is because a strong greenback eats away foreign investment gains when repatriated in U.S. dollar terms, pushing them into the red even when international stocks are performing well. As such, the strength in the greenback has compelled investors to flock to currency-hedged ETFs (see: all Developed Asia-Pacific ETFs here).
Solid Trends
The Nikkei 225 Stock Average is Asia’s best-performing major benchmark for 2023. The outperformance is expected to continue as the economy has rebounded strongly after fully reopening in the second half of last year. Both business and service activities are growing this year thanks to the strength in consumer spending and the reopening of borders.
Japan’s economy expanded at a faster pace than initially estimated as businesses ramped up spending. GDP grew at an annualized 2.7% in the first quarter, up from the initial reading of 1.6% growth. Bank of Japan is maintaining its accommodative policy stance and expects inflation to ease in the second half of this year. A weaker yen is boosting sentiment in the exporter-heavy market, driving the rally in Japan’s stocks.
Strategists at Goldman Sachs cited solid fundamentals and expectations for structural changes that “justify a bullish stance” on the nation’s equities. Factors including an inbound recovery, plans for robust capital expenditure and the ongoing monetary easing at the Bank of Japan have brightened the economic outlook for Japan. In addition, companies are announcing solid earnings, valuations are cheap and long-term investors are positioned in the market, per a Goldman analyst (read: ETFs to Tap the Surge in Japan Stocks).
According to John Vail, chief global strategist at Nikko Asset Management Co., domestic and foreign investors are optimistic about Japan relative to the United States and Europe, as it does not face an imminent recession and yet has very low valuations. Fabiana Fedeli, chief investment officer for equities and multi assets at M&G Plc, believes that Japan’s stocks have more room to run. “Companies in Japan were improving their balance sheets and were giving back to shareholders in terms of buybacks and dividends,” Fabiana Fedeli cited.
According to a report by Reuters, hedge funds sold European stocks last week to invest in stocks in the United States and Japan. These funds have taken the largest bullish position in Japanese stocks seen in about two years.
ETFs In Focus
WisdomTree Japan Hedged Equity Fund (DXJ - Free Report) – Up 26.4%
With AUM of $2 billion, WisdomTree Japan Hedged Equity Fund seeks to provide exposure to the Japanese equity market while hedging exposure to fluctuations between the U.S. dollar and the yen. It targets the Japanese equity stock market without the currency risk by tracking the WisdomTree Japan Hedged Equity Index.
WisdomTree Japan Hedged Equity Fund trades in a good average daily volume of 301,000 shares and charges 48 bps in annual fees (read: Japan Currency Hedged ETF Hits New 52-Week High).
Xtrackers MSCI Japan Hedged Equity ETF (DBJP - Free Report) – Up 26.2%
Xtrackers MSCI Japan Hedged Equity ETF tracks the MSCI Japan U.S. Dollar Hedged Index, which is designed to provide exposure to Japanese equity markets, while at the same time mitigating exposure to fluctuations between the value of the U.S. dollar and Japanese yen.
With AUM of $316 million, Xtrackers MSCI Japan Hedged Equity ETF trades in an average daily volume of 28,000 shares and charges 45 bps in fees per year.
iShares Currency Hedged MSCI Japan ETF (HEWJ - Free Report) – Up 25.8%
This is a hedged version of the popular fund iShares MSCI Japan ETF (EWJ - Free Report) . It offers broad exposure to a wide range of Japanese companies that may potentially benefit from Japan's stimulus policies while mitigating exposure to fluctuations between the value of the Japanese yen and the U.S. dollar.
iShares Currency Hedged MSCI Japan ETF has amassed nearly $156.2 million in its asset base and sees volume of about 100,000 shares a day. It charges 50 bps in fees per year from investors.
Franklin FTSE Japan Hedged ETF (FLJH - Free Report) – Up 25.1%
Franklin FTSE Japan Hedged ETF provides access to the Japanese stock market and seeks to reduce the impact of the yen relative to the U.S. dollar. It comes at a low cost with expense ratio of 0.09%.
Franklin FTSE Japan Hedged ETF has accumulated $14.9 million in its asset base while trading in an average daily volume of 100,000 shares.
WisdomTree Japan Hedged SmallCap Equity Fund (DXJS - Free Report) – Up 18.6%
With AUM of $25.7 million, WisdomTree Japan Hedged SmallCap Equity Fund offers exposure to the small-cap segment of Japan’s equity market while hedging exposure to fluctuations between the U.S. dollar and the yen. It follows the WisdomTree Japan Hedged SmallCap Equity Index.
WisdomTree Japan Hedged SmallCap Equity Fund trades in solid volume of 7,000 shares per day and charges 58 bps in annual fees.