Analyst Suggests Caution on Popular Japan ETF

Following Thursday's savage plunge that saw Japanese stocks notch their worst one-day performance in more than two years, it is no surprise that ETFs focused on the world's third-largest economy are tumbling today.

That group includes the WisdomTree Japan Hedged Equity Fund (NYSE:DXJ), an ETF that has gained rock star status in 2013 as the yen has plunged, boosting Japanese stocks in the process.

At this writing, DXJ is down about 5.6 percent, but is off its worst levels of the day that saw ETF down more than eight percent. Before Thursday, DXJ was up a jaw-dropping 28.4 percent in the past three months. Now home to almost $10.8 billion in assets under management, DXJ has been the top asset-gathering ETF in the world this year.

Following the turbulence for Japan ETFs on Thursday, one analyst is expressing a cautious view on DXJ.

"Investors should not just chase top performers this year and this is a good example," said S&P Capital Director of ETF Research Todd Rosenbluth. "This should be a satellite holding not a core one though it has a low beta."

In fairness to DXJ, it is not the only Japan ETF trading noticeably lower today. The rival iShares MSCI Japan ETF (NYSE:EWJ), which has almost $12.6 billion in AUM, is down 5.4 percent. The iShares S&P/TOPIX 150 Index Fund (NYSE:ITF) is being dragged lower by the steep decline in Japan's TOPIX Index. ITF, previously one of the unheralded but stellar Japan ETFs is down 6.3 percent.

After this year's surge, some Japanese stocks that are major components of the aforementioned ETFs may be overvalued, according to Rosenbluth.

In reference to DXJ, he said "Though we still like this ETF, many holdings are fairly or overvalued like Canon, Honda (NYSE:HMC) and Toyota (NYSE:TM)."

Those stocks combine for just over 11 percent of DXJ's weight and about 10.5 percent of EWJ's weight.

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