EWJ IShares MSCI Japan New

Since the end of 2012, economic policy in Japan has been all about ‘Abenomics’. This program, instituted by Shinzo Abe, the Prime Minister of Japan, looks to eliminate deflation and reinflate the Japanese economy through a variety of government initiatives.

So far, the program has been a success for equities, as the broad Japanese markets have seen incredible gains. However, while many investors that bought Japanese securities saw nice profits thanks to this trend, arguably one of the biggest beneficiaries was WisdomTree (WETF).

That is because this company—the only pure play publicly traded ETF issuer on the market—experienced great success with its WisdomTree Japan Hedged ETF (DXJ). This fund crushed unhedged Japanese ETF counterparts thanks to a massive slide in the yen against the dollar (due to Abenomics policies) and it quickly became a driver for WisdomTree’s massive gains in assets under management.

In fact, DXJ now has more than $11 billion in assets under management, blowing away the fund provider’s second biggest fund—which has just under $4 billion in assets—and making the ETF the company’s only representative on the list of 30 most popular equity ETFs on the market today (see Best ETF Strategies for 2014).

The fund has become so popular—thanks in large part to the degree of outperformance of hedged funds over unhedged Japan funds as of late—that DXJ is even closing in on the iShares MSCI Japan ETF (EWJ) for the title of most popular Japan fund as well.

Replicating This Success

Obviously with this kind of success, WisdomTree has been moving further into the hedged ETF world looking to find another concept that resonates so well with investors. The company has launched a Small Cap Hedged Fund (DXJS) targeting Japan, as well as funds focusing on other nations like Germany, the UK, and Korea (read For Japan ETFs, Think Small Caps).

None have really caught on though, and WisdomTree has refocused back on Japan with a recent launch of five ETFs that hedge out yen exposure in the market. These funds will take a sector focus, and look to play on some of the key trends which may result from Abenomics for investors who want to get in on a continuation of this story in some of Japan’s most impacted sectors.

According to WisdomTree, this sector strength will be concentrated in a few areas which look to play off of three Abenomics trends including reflation, growth, and yen sensitivity. These sectors include real estate and financials for reflation, tech/media/telecom and health care for growth, and then capital goods for yen sensitivity.

All of these segments now have their own ETFs that use a hedging technique as well, and we have described some of the initial details for these funds below:

Hedged Financials Fund: DXJF and the Hedged Real Estate Fund: DXJR

These ETFs looks to benefit from Abenomics’ plan to reflate financial asset prices. The Bank of Japan has a goal of keeping the risk premium of owning equities down, purchasing ETFs and making REIT investments as well, so a financial play could be way to target this tenet of Japanese economic policy (see all the Top Ranked ETFs here).

DXJF will have a focus on Banks (60%), while insurance and capital markets look to receive double digit weights as well. For DXJR, real estate management companies make up a plurality of assets in the fund at roughly 42% of the total, while REITs take up about 26%, and construction & engineering firms account for roughly 13% of the total.

Hedged Capital Goods Fund: DXJC

The capital goods segment in Japan has a heavy focus on exports, as this sector includes firms in the aerospace, automotive, and heavy equipment industries just to name a few. These sectors are very sensitive to changing exchange rates, so they could definitely see a boost from a continued yen slide.

Investors can play this with DXJC, a fund that puts roughly 31% of its assets in the automobile space, and then roughly 27% in machinery, and 15% in auto components. Top stocks in this fund look to include the well-known Toyota and Honda Motor companies, as well as Fanuc, Nippon Steel, and Nissan Motor to round out the top five.  

Hedged Health Care Fund: DXJH and the Hedged Tech, Media and Telecom Fund: DXJT

Growth looks to also be an important part of getting Japan out of its slump, and both the health care and the broad tech, media and telecom industry look to pull Japan higher. Abe has said that health care is important to his growth strategy, while due to government initiatives which support capital spending, the tech, media, and telecom space could also benefit (read Direxion Launches Leveraged Japan ETFs).

DXJH looks to give investors direct exposure to the pharma side of the health care play, as close to 70% of the assets are targeted at this segment, while health care equipment at 15.2% of assets comes in second. For the tech and media fund, DXJT, electronic equipment instruments is the biggest sector at 31.6% of assets, followed by wireless telecoms, and tech hardware which make up, respectively, 19% and 12% of the assets.

All Five Funds

Once again, all five will strip out yen exposure, leaving just the stocks’ movements to determine returns. It is also worth noting that all five funds will charge just 43 basis points a year in fees for this exposure, making them relatively cheap sector funds, at least when looking at international securities, and especially so given the hedging employed.

Can They Succeed?

Admittedly, I was a little skeptical of the approach when I first saw the filing for these five funds. The hedged equity ETF world is getting pretty crowded, and one could argue that many of the gains have already been had in the Japan ETF space (see Japanese Yen ETF Investing 101).

However, it does appear as if there is a solid methodology behind the selection of these five industries, and that these could benefit from the next phase of Abenomics. If this is the case, and if a positive economic path can continue in Japan, these might see some success and become another group of popular ETFs for WisdomTree, though it will likely be a tough sell in the near term given the shaky market in Japan and current worries over growth.

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WISDMTR-J HEF (DXJ): ETF Research Reports
 
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ISHARS-JAPAN (EWJ): ETF Research Reports
 
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