4 Outperforming ETFs For Japan Exposure

While the U.S. economy has started to show signs of slowdown, Japan is enjoying its longest stretch of economic growth in more than a decade. A mix of Bank of Japan’s easy money policies and Prime Minister Shinzo Abe’s stimulus and reform through “Abenomics” are paying off, leading to a stock market rally and fat corporate profits.

The world's third largest economy was on a solid footing with 2.2% growth in the first quarter, representing the fifth consecutive quarter of growth. This was up from 1.4% growth recorded in the fourth quarter and was backed by a pickup in consumer spending, strong business confidence, and rise in exports.

The unemployment rate dropped to the lowest level in more than 22 years at 2.8% and wages are rising at the fastest pace in decades. In particular, wages increased 2.2% in 2016 after gaining near 2% for two years, which was the strongest streak since the early 1990s. Adding to the strength are investments linked to the Tokyo 2020 Olympics and rising global activities (read: Japan's Race to 2% Inflation: ETFs in Focus).

Further, a weaker Japanese yen against the greenback is benefiting exporters and the manufacturing industry, resulting in soaring stock prices. This is because Japan is primarily an export-oriented economy and a weaker currency makes its exports more competitive. Though Japanese yen got a boost occasionally, the currency is down 5% so far this year. This trend is likely to continue given that the Fed is on track to raise interest rates next month that would bolster dollar in the near term.

The Bank of Japan expects the economy to grow 1.6% in the current fiscal ending March 2018. However, lower inflation remains an overhang on economic growth. Consumer prices in April rose for the fourth consecutive month by just 0.4% led by an increase in energy and fresh food prices. The Bank of Japan expects inflation of nearly 1.4% in the current fiscal year.

Given that Japan is exhibiting the strongest growth right now, investors seeking to participate in the country’s development should definitely invest in Japan ETFs. While most ETFs have been delivering handsome returns in the year-to-date time frame, we have highlighted the ones that are crushing the broad market fund (AX:SPY) and the ultra-popular Japanese fund EWJ (see: all the Developed Asia-Pacific ETFs here).

Further, these funds are leading the Japanese space higher this year and have a Zacks ETF Rank of 3 or ‘Hold’ rating, suggesting more room for upside in the coming months.

iShares MSCI Japan Small-Cap ETF (HN:SCJ)

This fund offers exposure to the small cap segment by tracking the MSCI Japan Small Cap Index and holds 834 stocks in its basket. It is widely spread out across components with none holding more than 0.86% of assets. However, about one-fourth of the portfolio is allotted to industrials, closely followed by consumer discretionary (17.1%), information technology (12.8%), consumer staples (10.9%) and materials (10.4%). The fund has managed AUM of $145.2 million whiles sees a lower average daily volume of around 53,000 shares. Expense ratio comes in at 0.49%. The fund has gained 12.5% so far this year.

WisdomTree Japan SmallCap Dividend Fund DFJ

This fund targets the dividend paying small cap stocks in the Japanese equity market by tracking the WisdomTree Japan SmallCap Dividend Index. Holding 689 securities in its basket, it has a spread out exposure to various components as each firm holds less than 0.9% of assets. From a sector look, industrials and consumer discretionary take the top two spots with 25.7% and 21.1% share, respectively, while information technology, financials and materials round off the next three with a double-digit allocation each. The product has amassed $493.3 million in its asset base while trades in a moderate volume of under 61,000 shares. It charges an annual fee of 58 bps and has gained about 11.5% in the year-to-date timeframe.

iShares Edge MSCI Min Vol Japan ETF JPMV

This fund offers exposure to 176 Japanese stocks having lower volatility characteristics relative to the broader Japanese equity markets by tracking the MSCI Japan Minimum Volatility Index. The fund is widely spread across a number of securities as none of these holds more than 1.80% of assets. Industrials, consumer discretionary, consumer staples and health care are the top four sectors with a double-digit exposure each. The ETF is often overlooked by investors as depicted by AUM of $31.2 million and average daily volume of nearly 2,000 shares. The fund charges 30 bps in annual fees and has added 9.7% since the start of the year (read: Japan ETF Hits New 52-Week High).

SPDR MSCI Japan StrategicFactors (NYSE:QJPN) ETF QJPN

This fund offers a low-volatility strategy with an equal focus on high quality and attractively valued firms. It follows the tracks the MSCI Japan Factor Mix A-Series Capped Index and holds 309 securities in its basket, with none holding more than 2.71% of assets. Sector wise, consumer discretionary takes the largest share at 21.3% while industrials, information, technology, healthcare, financials and consumer staples round off the next five spots with double-digit exposure each. The product has attracted $14.3 million in its asset base while charges 30 bps in annual fees. Volume is paltry exchanging less than 2,000 shares in hand per day. QJPN is up 9.3% so far this year.



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SPDR-SP 500 TR (SPY (NYSE:SPY)): ETF Research Reports

ISHARS-JAPAN (EWJ): ETF Research Reports

ISHARS-MS JP MV (JPMV): ETF Research Reports

WISDMTR-JP SC D (DFJ): ETF Research Reports

ISHARS-MS JA SC (SCJ): ETF Research Reports

SPDR-MSCI JSF (QJPN): ETF Research Reports

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