Here's a fun fact: Of this year's top 10 U.S.-focused sector exchange-traded funds, four are healthcare funds and three are dedicated biotech ETFs.
While the returns of those ETFs are impressive, easily trouncing the broader market and standard healthcare ETFs, the interesting thing is that none of these funds is the best-performing healthcare ETF of 2015.
The Japanese Play
In what may be a surprise to some, the title of 2015's best healthcare ETF belongs to the WisdomTree Japan Hedged Health Care Fund (NYSE:DXJH). A simple way of looking at DXJH is that it is the healthcare answer to the wildly popular WisdomTree Japan Hedged Equity Fund (NYSE:DXJ), one of the largest U.S.-listed Japan ETFs.
Related Link: Portfolio Building With Currency-Hedged ETFs
Relative to U.S. healthcare ETFs, DXJH has been dominant this year. The currency-hedged healthcare fund has returned nearly 39 percent, an advantage of about 1,000 basis points over the best-performing U.S. healthcare ETF.
Making DXJH's performance this year all the more impressive is the fact that the ETF is lightly allocated to biotech stocks. As seasoned biotech investors know, most of the biggest biotech stocks, and the dynamic small-cap names for that matter, are U.S.-based companies meaning they are not going to be found in international sector ETFs. DXJH has exposure to eight healthcare industry groups, but biotech is the second-smallest at a weight of just 1.7 percent, according to WisdomTree data.
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.
Bolstering the case for yen-hedged ETFs heading into 2016 is the Bank of Japan (BOJ) and the potential to need to boost its already expansive monetary easing regime.
BOJ has engaged in one of the largest quantitative easing schemes of any central bank. The central bank's current asset-purchasing program is valued at 80 trillion yen, and Japan's interest rates are zero percent, or by the estimates of some economists, negative in real terms.
Those factors would seemingly make more potentially yen-depressing QE unlikely, but some analysts see more, not less, Japanese QE on the way.
DXJH follows the cap-weighted WisdomTree Japan Hedged Health Care Index. Pharmaceuticals is the ETF's largest industry weight at over 62 percent.
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