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After many years of falling equity prices, mounting deficits and deflation, the Japanese economy could be finally set to return to glory under the supervision of newly elected Prime Minister Shinzo Abe. Prime Minister Shinzo Abe’s new government promises to revive an economy which has been in doldrums for many years, despite some impressive technological prowess (Developed Asia Pacific ETF Investing 101).
The Japanese currency – the yen has been in a long-term uptrend of late. An appreciating currency makes the Japanese products expensive for buyers outside the region thereby hurting its export potential, a crucial factor for the island nation.
In fact, the yen rose almost to a level of 6% against U.S. dollar between the period of April 2011 and November 2012. This forced many manufactures to shift their production to other regions hurting the economy growth even further (Japanese Yen ETFs: Any Hope in 2013?).
But now, the Prime Minister is determined to prevent uncontrolled rise of the currency and to boost the economy as promised during the run-up to his election. Shinzo Abe has asked the Bank of Japan to take on "unlimited monetary" easing in order to weaken the Japanese currency with an aim to revitalize exports. Abe mentioned that if the Bank fails in this respect, he would move to take further strong measures, possibly even curtailing the bank’s independence.
With the new political party set to keep the value of the currency low, the Japanese equity market is expected to show strength going forward. Investors have started believing that the new government will be able to achieve its target in respect of the currency, which could help to boost exporters and stocks across the board (How Relevant is Japan?).
Amid government initiatives for monetary easing, the benchmark Nikkei 225 rose to its highest level since the day before the 2011 earthquake and is expected to further gain strength on a note of somewhat weaker currency. Japanese stocks rallied to deliver new highs and gain investor confidence in the market.
With the yen losing value and the Japanese equity market shooting up, Japanese ETFs have also shown some strength. So if you believe that this trend can continue, and that the new government will be successful in revitalizing the economy, any of the following three Japanese equity ETFs could make for interesting picks at this time:
WisdomTree Japan Hedged Equity Fund (DXJ)
DXJ was one of the best performing ETFs in the Japanese ETF space after the cabinet attempt to revive the economy through aggressive monetary easing. DXJ has also been designed to provide a hedge against currency exposure, the reason why the ETF experienced a huge amount of inflow in the past few days (Currency Hedged ETFs: Top International Picks?).
DXJ offers a broader play on the Japanese stocks providing exposure to 271 stocks. Mitsubishi UFJ Financial Group, Canon Inc and Takeda Pharmaceutical Co Ltd are the top three choices of the fund.
In terms of sectors, Industrials dominate the holding pattern while Consumer Discretionary, Information Technology, Health Care and Materials also get double digit allocation in the fund. The fund charges a fee of 48 basis points on an annual basis.
db-X MSCI Japan Currency-Hedged Equity Fund (DBJP)
With the yen sliding, DBJP is an interesting option to pick with the Japanese economy set to revive after four years of continuous recession and decades of deflation. DBJP tracks the MSCI Japan US Dollar Hedged Index, which provides exposure to Japanese equity markets and hedges the Japanese yen to the U.S. dollar by selling Japanese yen forwards (Is It Time To Buy The Hedged Currency ETFs?).
However, DBJP does not appear to be as popular as DXJ. Since its inception, the fund could manage to amass an asset base of $5.2 million and trades at very low volume levels. In terms of the total portfolio, like DXJ, it also has its asset base spread across a large basket of 230 securities.
Among sectors exposure, Industrials is the top priority followed by consumer cyclical and financial services. This fund’s expense ratio is just 2 basis points higher than DXJ, charging a fee of 50 basis points on an annual basis.
iShares MSCI Japan Index Fund (EWJ)
For broad exposure in the Japanese market, investors should look to EWJ. The fund is the oldest and most popular ETF tracking the Japanese market. EWJ offers liquidity to investors with a trading volume of more than 34 million shares a day. The fund has $5.1 billion assets under management which it invests in a large basket of 312 Japanese securities (A Technical Look at the Japanese ETF (EWJ - ETF report)).
The ETF offers the benefit of diversification to investors with a low concentration in the top 10 holdings. The fund invests only 23.9% of its asset base in these top holdings.
It thereby rules out company risks to a large extent, doing a great job of spreading out assets. In terms of individual holdings, Toyota Motor Corp takes the top spot while Mitsubishi and Honda occupy the second and third position respectively.
Among sectors, again Industrials, Financials and Consumer Discretionary are given the top three spots. The fund charges an expense ratio of 51 basis points a year.
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