Published May 01, 2013
Being bullish on Japan over the past six months has certainly been profitable. That much is highlighted by the WisdomTree Japan Hedged Equity Fund (DXJ), the most impressive ETF in 2013 on asset-gathering basis.
It was not that long ago that DXJ had less than $1 billion in assets under management. Today that number is close to $7.7 billion and investors have been rewarded for their faith in this is ETF. Over the past six months, DXJ has surged over 50 percent compared to 30 percent for its primary rival, the iShares MSCI Japan Index Fund (EWJ). In the process, the experts and pundits that preferred EWJ because it was the more established name now look downright silly.
Abenomics, as Japan's yen weakening gambit has become known, has benefited plenty of other ETFs tracking the world's third-largest economy. Some of those ETFs are not even Japan-specific plays. For a look into the world of ETFs with significant Japan exposure outside of DXJ and EWJ, consider the following funds.
WisdomTree Japan SmallCap Dividend Fund (DFJ) Japanese small-caps have arguably flown under the radar during this renaissance for the country's equity markets. That is perhaps the result of U.S. investors limiting the universe of Japan-specific ETFs to DXJ and EWJ, but the WisdomTree Japan SmallCap Dividend Fund merits a place at the adult table.
DFJ is up 17 percent in the past three months and while not on par with DXJ, the small-cap ETF is showing impressive asset-gathering ability as well. Six weeks ago DFJ had less than $172 million in AUM. That number has since swelled to $237.3 million.
Interestingly, WisdomTree has filed plans for a small-cap equivalent to DXJ. That is relevant because DFJ does not offer the hedged USD/JPY mechanism that DXJ features. Whether DFJ is converted to a hedged currency ETF remains to be seen, but for now, the ETF is one of the best Japan-specific bets that is getting little publicity.
iShares S&P/TOPIX 150 Index Fund (ITF) Most U.S. investors that follow Japanese stocks have at least heard of the benchmark Nikkei 225 Index. Some are not as familiar with the Topix. ITF tracks the S&P/Topix 150 Index, which is a play on the Topix, encompassing 70 percent of the market capitalization of Japan's equity market.
On the surface, ITF is one of those ETFs the critics will love to hate. More than 11 years old with just $90.5 million and average daily volume of less than 31,000 shares could draw the ire of those that judge ETFs the way they would judge a beauty pageant.
There are several issues to consider regarding ITF. First, the ETF is home to some of the largest Japanese companies such as Toyota (TM) and Honda (HMC), so this is not an ETF littered with illiquid holdings. Second, ITF's annualized tracking error compared to its underlying index is just 0.4 percent, according to iShares data, which is decent among global ETFs.
Finally, and perhaps most importantly, ITF has surged 31 percent in the past six months while no one was paying attention. That is good enough to have slightly outpaced EWJ.
iShares MSCI Far East Financials Sector Index Fund (FEFN) The iShares MSCI Far East Financials Sector Index Fund is not for the faint of heart due to its light volume (just over 5,500 shares per day) and small AUM total ($6.3 million). It is also not for those looking for a Japan-specific ETF because Hong Kong and Singapore combine for over 36 percent of the fund's weight.
Still, Japan accounts for 62.8 percent of FEFN's weight and those that can get over the fact that FEFN does not trade everyday could find a compelling opportunity with this ETF. Six of FEFN's top-10 holdings are Japanese financial service firms and that may not seem important knowing that deal-making activity in Asia-Pacific was slack in the first quarter.
However, one quarter of sluggish mergers and acquisition activity does not mean the rest of the year will be the same. In fact, bankers in the region say the deal pipeline is robust and announcements will increase in the coming months, according to the Wall Street Journal. That could be a boon for FEFN, which has already gained 20 percent year-to-date.
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