With the Guggenheim CurrencyShares Japanese (FXY) up 10.5 percent year-to-date, ranking it as one of the best-performing developed markets currency exchange-traded funds, it's not surprising that Japan hedged ETFs are struggling.
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Japan, The Yen And The Market
Not only is the yen acting as the safe-haven investment of the moment, global investors are displaying doubts about the effectiveness of the Bank of Japan's (BOJ) stimulus efforts. On the surface, many investors might criticize the lack of inflation, weak macro data and Japans corporate exposure to emerging markets as good reasons why Japans equity market should have played catch up. However, investors are ignoring a really significant divorce between Japanese earnings revisions and a number of macro indicators.
Additionally, there are other positive factors to consider with Japanese equities and the relevant ETFs, namely Japan's shift away from corporate stinginess to shareholder rewards in the form of increased buybacks and dividends. That theme should benefit the WisdomTree Japan Hedged Financials Fund (WisdomTree Trust (DXJF)).
The segment of the market where sentiment turned most negative on Japan and which interestingly has been conducting the most stock buybacks are Japanese financials, said WisdomTree Research Director Jeremy Schwartz in a recent note. Whereas our Japanese exporter basket, which tends to include some of the better run and more profitable ventures in Japan, has a net buyback yield of 0.84 percent as of March 31, 2016 (up approximately fourfold since earlier in 2013 and 2014), Japanese financials have seen their net buyback yields grow to approximately 2 percent, a doubling of the net buyback yield from the end of 2013. The dividend yield for Japanese financials has also grown from 1.8 percent at the end of 2013 to over 3 percent at the end of March 2016.
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DXJF's underlying index, the WisdomTree Japan Hedged Financials Index, has a dividend yield of 3 percent. That is, obviously, vastly superior to Japanese government bonds, but is also nearly 90 basis points more than the trailing 12-month dividend yield on the Financial Select Sector SPDR Fund (XLF).
Diversified and regional banks combine for over 58 percent of DXJF's weight with various insurance providers combining for a quarter of the fund's lineup.
Combining buyback and dividend yields further bolsters the case for DXJF relative to developed markets equivalents.
This combined dividend and buyback yield of close to 5 percent for Japanese financials makes them some of the most attractively priced global financial stocks around. The shareholder yields for developed international financials and U.S. financials were 4.58 percent and 4.15 percent, respectively, added Schwartz.
Disclosure: Todd Shriber owns shares of XLF.
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