As international investing delighted all and sundry in 2017, the Japanese stock market was on a stellar ride leading equities back to heights last seen in 1991. Both the Topix and the Nikkei climbed more than 19% for the year with the former capping the best annual performance since 2013.

The rally was driven by a mix of Bank of Japan’s easy money policies and Prime Minister Shinzo Abe’s stimulus through “Abenomics” that are paying off, leading to strong growth and fat corporate profits. Japan is enjoying its longest stretch of economic growth since the 1990s, expanding for seven consecutive quarters. The robust growth is likely to continue in 2018 given strength in consumer spending, strong business confidence, and rise in exports. Notably, Japanese exports accelerated for a 12th straight month in November, pointing to growing momentum in the world’s third-largest economy.

The landslide victory of prime minister Shinzo Abe in a snap election has infused further optimism in the economy and the stock market. The success has bolstered his chances of winning another three-year term in September 2018 and suggests the continuation of “Abenomics” which hinges on three tactics, namely extreme monetary easing, flexible fiscal policy and structural reforms (read: Japan ETFs in Focus as Shinzo Abe Wins).

Additionally, a weaker yen is benefiting exporters and the manufacturing industry, leading to robust global demand for Japanese products. Notably, Japan is an export-oriented economy and a weaker currency makes its exports more competitive. This trend will prevail given tax cuts in the United States and the Fed’s policy tightening that would bolster dollar in the near term. On the other hand, oil prices are back to the two-and-a-half-year high on the back of tightening supply and reducing inventory. The dual tailwinds of rising oil prices and strengthening global economies will continue to raise the appeal for riskier assets, keeping yen subdued.

Moreover, Japan is the leader in the development and use of industrial robots, touted as the fourth industrial revolution, which is creating new opportunities and fueling economic growth.

While the rally has been broad based, small-cap stocks and ETFs turned out the hottest investments owing to cheaper valuation relative to large caps. Below we have highlighted five ETFs that have actually led the Japanese ascent in 2017 and have a Zacks ETF Rank #1 (Strong Buy) or 2 (Buy), suggesting their outperformance in the New Year (see: all Developed Asia-Pacific ETFs here).  

WisdomTree Japan SmallCap Dividend Fund (DFJ Quick QuoteDFJ - Free Report)

This fund targets the dividend paying small-cap stocks in the Japanese equity market by tracking the WisdomTree Japan SmallCap Dividend Index. Holding 731 securities in its basket, it has a spread out exposure to components as each firm holds less than 0.9% of assets. From a sector look, industrials and consumer discretionary take the top two spots with 26.6% and 22.3% share, respectively, while materials, information technology and financials round off the next three with a double-digit allocation each. The product has amassed $790.6 million in its asset base while trades in a moderate volume of 68,000 shares. It charges 58 bps in annual fees and has surged 31.5% in 2017. The fund has a Zacks ETF Rank #1 with a Medium risk outlook.

iShares MSCI Japan Small-Cap ETF (SCJ Quick QuoteSCJ - Free Report)

This fund offers exposure to the small-cap segment by tracking the MSCI Japan Small Cap Index and holds 886 stocks in its basket with none holding more than 0.69% of assets. However, about one-fourth of the portfolio is allotted to industrials, closely followed by consumer discretionary (17.4%), information technology (12%), materials (10.8%) and consumer staples (10.6%). The fund has managed AUM of $302.8 million whiles sees a lower average daily volume of around 46,000 shares. Expense ratio comes in at 0.48%. The fund has gained 31% and has a Zacks ETF Rank #1 with a Medium risk outlook.

WisdomTree Japan Hedged SmallCap Equity Fund (DXJS Quick QuoteDXJS - Free Report)

DXJS offers exposure to the Japanese small-cap stocks while at the same time provides hedge against any fall in the Japanese yen. This is easily done by tracking the WisdomTree Japan Hedged SmallCap Equity Index. The product holds 733 stocks in its basket with each accounting for less than 1% of assets. Industrials and consumer discretionary are the top two sectors with 26.5% and 22.3% share, respectively, while materials, information technology and financials round off the top five. The fund has accumulated $231.3 million in its asset base and charges 58 bps in fees per year from investors. Volume is lower as it exchanges 46,000 shares in hand per day on average. The ETF is up 28.8% in 2017 and has a Zacks ETF Rank #2 with a Medium risk outlook.

First Trust Japan AlphaDEX Fund (FJP Quick QuoteFJP - Free Report)

This fund employs an AlphaDEX methodology and ranks stocks in the space by various growth and value factors, eliminating the bottom-ranked 25% of the stocks. This is easily done by tracking the NASDAQ AlphaDEX Japan Index and the approach results in a basket of 100 stocks that are widely spread out across various components with each security holding less than 2.7% of assets. Here again, consumer discretionary and industrials are the top two sectors with 26.3% and 20.3% share, respectively, while materials and information technology round of the next two with double-digit exposure each. FJP has AUM of $83.9 million and average daily volume of around 9,000 shares. Expense ratio comes in at 0.80%. The fund has risen 27.4% this year and carries a Zacks ETF Rank #2 with a Medium risk outlook (read: 5 Reasons to Buy Japan ETFs).  

WisdomTree Japan Hedged Capital Goods Fund

This ETF seeks to provide exposure to the Japanese capital goods market while hedging exposure to fluctuations between the U.S. dollar and the yen by tracking the WisdomTree Japan Hedged Capital Goods Index. Holding 158 stocks in its basket, the fund is concentrated on the top two firms with a combined 16.3% of assets while the other securities account for less than 5% share. From an industry look, automobile manufacturers and industrial machinery make up the top two segments with nearly one-fourth of the portfolio. The product has accumulated $5.8 million in its asset base while charges 48 bps in annual fees. It trades in meager average daily volume of 1,000 shares and is up about 27% in 2017. DXJC has a Zacks ETF Rank #2 with a High risk outlook.

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