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Are Currency-Hedged Japan ETFs Safer Bets Now?

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Currency-hedged Japan ETFs like iShares Currency Hedged MSCI Japan ETF (HEWJ - Free Report) have surpassed the S&P 500 in most part of this year. The ETF HEWJ is off 3.1% this year versus 17.4% losses seen in the S&P 500 (as of Jul 19, 2022). HEWJ has gained 0.3% versus a 14.1% decline in the S&P 500. HEWJ has added 4.5% against 4.2% gains in the S&P 500 past month.

Japan ETFs, overall, performed better than the S&P 500 past quarter as regular ETF (EWJ - Free Report) (down 8.4%) topped the S&P 500 (down 11.8%). The reason behind this is the country’s focus on exports and the rising greenback. The country’s key indexes are filled with stocks that are export-oriented and thus fare better in a falling yen environment.

Invesco CurrencyShares Japanese Yen Trust (FXY - Free Report) is down 16.8% this year as Japan’s central bank is still practicing the easy-money policies and other countries including the United States have been executing super-hawkish monetary policies. While the greenback has been super-strong lately on faster and fatter Fed rate hikes, yen is reeling under pressure and that’s what bode well for Japan’s export-oriented economy.

The Japanese economy shrank 0.1% sequentially in Q1 of 2022, compared with flash data of a 0.2% decline and after an upwardly revised 1.0% growth in Q4. The latest figure was better than market forecasts of a 0.3% drop amid an upward revision of private consumption (0.1% vs flat reading in the preliminary print and after a marginally 2.4% rise in Q4).

In company news, Japanese automaker Toyota lately said its production in August would be around 700,000 units, lower than the previously announced figure of 850,000 units, due to a parts shortage related to Covid disruptions. Though export and business investment numbers are not hopeful, still the sheer nature of the Japanese equity index has favored the related ETFs.

Moreover, if there is a relief rally in beaten-down tech shares, Japanese companies may gain ahead. Chip-making equipment maker Tokyo Electron, Robot maker Fanuc and Air-conditioning maker Daikin Industries, Tokyo Electron, Lasertec, Keyence, Recruit Holdings and SoftBank Group are some of the companies that may gain.

ETFs in Focus

Against this backdrop, investors can rely on currency-hedged Japan ETFs as these have been showing less volatility compared with the key U.S. indexes.

iShares Currency Hedged JPX-Nikkei 400 ETF – Up 4% Past Month (as of Jul 19, 2022)

iShares Currency Hedged MSCI Japan ETF (HEWJ - Free Report) – Up 3.9% Past Month

Xtrackers MSCI Japan Hedged Equity ETF (DBJP - Free Report) – Up 3.9% Past Month

WisdomTree Japan Hedged SmallCap Equity Fund (DXJS - Free Report) – Up 3.0% Past Month

WisdomTree Japan Hedged Equity Fund (DXJ - Free Report) – Up 2.1% Past month