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Japan ETFs Beating S&P 500 in 2022: Here's Why

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Japan ETFs have emerged as market-beating this year, especially the currency-hedged ones. 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 4% this year versus 24.8% losses seen in the S&P 500 (as of Oct 14, 2022). HEWJ has lost 3.9% versus a 7.5% decline in the S&P 500.

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. The U.S. dollar ETF is up 18% this year and up 5% in the past three months while Invesco CurrencyShares Japanese Yen Trust (FXY - Free Report) is down 22.7% 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.

FXY is off 6% in the past three months. 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. Japan's prime minister Fumio Kishida recently said that he supports the Bank of Japan's ultra-loose monetary policy even as the yen drops to a 24-year low.

The Japanese economy expanded 0.9% sequentially in Q2 of 2022, after an upwardly revised 0.1% growth in Q1. The latest figure was above market consensus of a 0.7% increase, growing for three quarters in a row. Also, business sentiment grew 2.0%, faster than initially thought of 1.4%, which was a reversal from a 0.1% decline in Q1. Net trade also contributed positively, with growth in exports stable (at 0.9%) while imports rose at a modest rate (0.7%).

Pretax profits among non-financial Japanese companies jumped 17.6% year over year to a record 28.32 trillion yen ($203 billion) in the April-June quarter, government data showed, thanks to a weak yen and the waning impact of the COVID-19 pandemic despite surging commodity prices. Capital spending rose 4.6%, rising for the fifth straight quarter, as companies intended to boost output capacity.

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.

Why to Buy Currency-Hedged ETFs

Investors must be interested in buying Japan ETFs as these are better-positioned. With the greenback likely to gain more strength due to faster Fed rate hike momentum, buying currency-hedged Japan ETFs would prove more profitable than the regular ones.

Against this backdrop, investors can rely on currency-hedged Japan ETFs that have been the outperformers in the past one month.

ETFs in Focus

WisdomTree Japan Hedged SmallCap Equity Fund (DXJS - Free Report) – Down 1.8% Past Month; Up 4.2% YTD

WisdomTree Japan Hedged Equity Fund (DXJ) – Down 3.3% Past Month; Up 3.2% YTD

Franklin FTSE Japan Hedged ETF (FLJH - Free Report) – Down 3.6% Past Month; Down 2.2% YTD

iShares Currency Hedged MSCI Japan ETF (HEWJ - Free Report) – Down 3.9% Past Month; Down 3.5% YTD

Xtrackers MSCI Japan Hedged Equity ETF (DBJP - Free Report) – Down 3.9% Past Month; Down 3.7% YTD

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