WisdomTree Plans Japan Bond Bear Strategy ETF

WisdomTree has enjoyed an incredible level of success with its ultra-popular Japan Hedged Equity Fund (DXJ) this year. Thanks to the success that has come from focusing on Japan, the company now appears ready to put out another product targeting the Japanese markets.

The issuer has filed for the Japan Bond Bear Strategy Fund, a strategy that would benefit investors if government bond yields rise (or in other words, bond prices slump). While a great deal of the key information – such as expense ratio or ticker symbol – was not available in the initial release, other important points were released in the filing.

We have highlighted those below for investors, who may be looking for a new fixed income play targeting Japan from WisdomTree should it pass regulatory hurdles:

Proposed Fund in Focus

The proposed ETF looks to track the price and yield performance of the WisdomTree Japan Bond Bear Strategy Index, before fees and expenses. At the same time, it seeks to provide hedge against any fall in the Japanese yen.

The product intends to maintain both short and long positions — short exposure to the monthly performance of Japanese Government Bonds (JGBs) and long exposure to the monthly returns of U.S. Treasury bills.

In terms of the currency hedge, the fund looks to enter into forward currency contracts or futures designed to partially offset exposure to the Japanese yen relative to the U.S. dollar. With this strategy, the fund looks to outperform when the yen is sliding, and underperform unhedged benchmarks when the yen is strengthening.

How does it fit in a portfolio?

This proposed product could be an interesting choice for investors seeking exposure to the Japanese fixed income market while keeping interest rate risk in check.

This is because the prime minister, Shinzo Abe, has started implementing his stimulus program, popularly known as Abenomics, in an effort to lift the world’s third largest economy out of feeble growth and deflationary pressure. Abenomics is a combination of aggressive quantitative easing policies from Bank of Japan (BOJ), increased public infrastructure spending and the devaluation of the yen.

Additionally, the BOJ plans to achieve a 2% inflation target within two years that would raise interest rates, including yields on JGB. If yields rise, JGB would fall as both yields and bond prices move in the opposite direction.

Yields on 10-year JGBs have risen to over 67 bps from around 35 bps in April when BOJ announced a plan to purchase more than ¥7 trillion ($68 billion) of bonds every month. This suggests a bearish trend for JGB at least in the short term.

Can it succeed?

The proposed ETF does not have any direct competitor due to its unique strategy. However, one note – PowerShares DB Inverse Japanese Govt Bond Futures ETN (JGBS) – could provide tough competition to the WisdomTree proposed product.

This ETN seeks to provide unleveraged exposure to the U.S. dollar value of the monthly returns on a short position in 10-year JGB futures plus the monthly T-Bill index returns. The note tracks the DB USD Inverse JGB Futures index. The product has managed assets worth $39.7 million so far, and charges 50 bps in fees annually.

The proposed fund, if approved, could give investors a new way to play the Japanese bond market. The product might charge higher fees from investors annually due to its unique bear strategy.

Given the volatility in the Japanese bond market, it is difficult to say how the proposed fund from WisdomTree will be received by investors should it pass regulatory hurdles. The success of the product depends highly on the timing of the launch, and how the Japanese economy is performing then.

Should the bond market be facing troubles though, we could see a surge in interest for this corner of the market, though only time will tell if this proposed WisdomTree fund is preferred over more established products like JGBS.

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