Japan ETFs In Focus As Business Confidence Hits 11-Year High

Business confidence among Japan’s biggest manufacturers is at an 11-year high, per a central bank survey. Strong global demand has been strengthening Japan’s economy.

Japan’s economy grew an annualized 2.5% in the third quarter compared with 2.9% in the prior quarter. The third-quarter growth data was revised from the initial reading of 1.4% owing to a rebound in exports. Moreover, exports increased 0.6% sequentially in the third quarter compared with an initial reading of 0.3% (read: Japan's GDP Growth Revised Upward: ETFs in Focus).

On a year-over-year basis, core consumer prices increased 0.8% in October, still far from BOJ’s 2% target. However, this is expected to be temporary as the economy is near full employment which will in turn bolster domestic consumption.

Survey Highlights

Bank of Japan’s Tankan survey of more than 1,000 companies reported a reading of 25 in its December report, highest since December 2006 and above the reading of 22 reported in September. This index shows the difference between firms that are upbeat about business conditions and firms that expect unfavorable conditions. According to the survey, firms expect to boost capital spending by 10.2% year on year.

Moreover, the index for non-manufacturers came in at 23, highlighting a 2-year high but unchanged from the previous survey.

Risks Involved

Japan is also subject to geopolitical risks as Asian markets suffer from massive volatility due to North Korea’s actions. Last month, North Korea launched a Hwasong-15 missile with improved technology that reached an altitude of more than 4,000 kilometers and travelled 1,000 kilometers before dropping into the Sea of Japan.

North Korea seems to be anything but willing to scrap its nuclear program, as it broke its two-month-long silence by testing a missile that flew higher than all missiles fired earlier. Moreover, increasing political tensions in the Middle East seems to be clouding the outlook for companies going into 2018.

Increased geopolitical uncertainty makes us look for currency-hedged ETFs focused on providing exposure to Japan (see Asia-Pacific (Developed) ETFs here).

WisdomTree Japan Hedged Equity Fund DXJ

This fund is suited for investors looking for a broad-based exposure to Japan’s economy. It seeks to invest in dividend-paying companies with an export tilt.

The fund has AUM of $9.4 billion and charges a fee of 48 basis points a year. From a sector look, Consumer Discretionary, Industrials and Information Technology are the top three allocations of the fund, with 24.9%, 22.3% and 13.5% exposure, respectively (as of Dec 15, 2017). Toyota Motor Corp, Mitsubishi UFJ Financial Group and Japan Tobacco Inc are the top three holdings of the fund, with 5.3%, 3.7% and 3.2% exposure, respectively (as of Dec 15, 2017). It has returned 18.2% year to date and 14.3% in a year (as of Dec 15, 2017). DXJ has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.

Deutsche X-trackers MSCI Japan Hedged Equity ETF DBJP

This fund seeks to provide exposure to Japanese equities with a large-cap focus, while hedging away the currency risk.

The fund has AUM of $1.9 billion and charges a fee of 45 basis points a year. From a sector look, Industrials, Consumer Discretionary and Technology are the top three allocations of the fund, with 20.6%, 19.3% and 12.9% exposure, respectively (as of Dec 14, 2017). Toyota Motor Corp, Mitsubishi UFJ Financial Group and Softbank Group Corp are the top three holdings of the fund, with 4.4%, 2.3% and 1.8% exposure, respectively (as of Dec 14, 2017). It has returned 17.3% year to date and 14.9% in a year (as of Dec 15, 2017). DBJP has a Zacks ETF Rank #1 with a Medium risk outlook.

iShares Currency Hedged MSCI Japan ETF HEWJ

This fund is the currency-hedged equivalent of EWJ. It seeks to provide exposure to Japanese equities with a large-cap focus, while hedging away the fluctuations between the USD and JPY.

The fund has AUM of $1.1 billion and charges a fee of 49 basis points a year. From a sector look, Industrials, Consumer Discretionary and Information Technology are the top three allocations of the fund, with 21.1%, 19.8% and 12.7% exposure, respectively (as of Dec 14, 2017). Toyota Motor Corp, Mitsubishi UFJ Financial Group and Softbank Group Corp are the top three holdings of EWJ, with 4.6%, 2.4% and 1.9% exposure, respectively (as of Dec 14, 2017). It has returned 19.5% year to date and 15.9% in a year (as of Dec 15, 2017). HEWJ has a Zacks ETF Rank #1 with a Medium risk outlook.

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