These are not good times for Japan exchange-traded funds. Not unless the Guggenheim CurrencyShares Japanese (FXY) is the ETF being considered. Due to the yen's status as a safe-haven, and a preferred safe-haven at that, FXY is up 8.7 percent year-to-date.
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That is not good news for the equity-based Japan ETFs and that goes for currency hedged and non-hedged funds. The two largest Japan ETFs trading in New York are down an average of 14.5 percent this year. Off the beaten path, investors could be doing significantly less bad with another Japan ETF, which could be a sign that when stocks in Asia's second-largest economy rebound, this ETF will be a leader.
That ETF is the Global X Scientific Beta Japan ETF (SCIJ). In the world of ETFs, there are probably too many descriptors of beta, be they smart, strategic or scientific, but there is not getting around the fact that the Global X Scientific Beta Japan ETF is down just 5.6 percent this year. That is significantly less bad than its marquee rivals in the Japan ETF space.
The Other Japan ETF
SCIJ, which debuted in May 2015, follows the Scientific Beta Japan Multi-Beta-Strategy Equal Risk Contribution Index. That benchmark provides investors exposure to multiple investment factors, including low volatility, momentum, size and value.
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Since 2014, Scientific Betas multi-factor approach to Japan has resulted in better performance, lower volatility, and lower drawdowns than both the hedged and unhedged versions of the MSCI Japan Index, said Global X in a recent research note. While hedging yen exposure worked spectacularly from 2014 to mid-2015, the currency ultimately reversed course and eliminated much of the strategys gains versus the unhedged benchmark.
As is the case with multi-factor ETFs focusing on U.S. stocks, SCIJ gives investors an advantage in that they do not need to time when a particular factor will outperform another. As Global X notes, the low volatility, momentum and value factors, among others, have solid for Japanese stocks over the past two years. SCIJ offers exposure to those factors under one umbrella.
Industrials are SCIJ's largest sector weight at 19.5 percent while financial services and consumer discretionary names each garner weights of close to 16 percent in the ETF. SCIJ's top 10 holdings combine for about eight percent of the ETF's weight.
Scientific Betas approach to risk is to mitigate the concentration risks that plague market cap weighted indexes, the factor risk of investing in a single-factor strategy, and model-specific risks of alternative weighting schemes. This multi-layered approach to diversification has produced lower volatility than both hedged and unhedged versions of MSCIs Japan Index, as well as lower drawdowns. Further, the strategy has benefitted from an average allocation of 19 percent towards low volatility stocks, which by nature, tend to have less volatility and lower drawdowns than the broad market, added Global X.
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