Time To Play The Bounce In Currency-Hedged Japanese ETFs?

It seems that the troubled days of Japan investing are about to end now. After witnessing a tumultuous 1H16 on a rising yen, Japanese shares lately turned their course thanks mainly to the sweeping victory of prime minister Shinzo Abe’s coalition in the upper house election on Sunday.

Responding to this win, Japan’s key equity index Nikkei rallied 3.98% on Monday while the broader Topix index shares jumped 3.79%. Hopes of new stimulus measures actually lifted investors’ sentiment.

After all, Abenomics – a monetary and fiscal firepower introduced by Shinzo Abe in 2013 to lift the world’s third largest economy from feeble growth and deflationary pressure – put Japan under the spotlight over the last few years (read: Japan ETFs to Buy on Negative Interest Rates).

Now the landslide victory of Shinzo Abe is being viewed as a chance to act freely on policy easing. Going by an article, Abe government indicated that it will boost agriculture exports from rural areas and invest in infrastructure sector. Government spending is especially needed as a strong yen and anemic demand affected corporate profits and in turn hurt capital spending plans.

He also stressed on better “access to child care and elderly care” as well as educational grants. Issuances of bonds for public-private partnerships and improving the tourism sector are also on Abe’s agenda.

Yen to Be on Downhill Ride?

While this bout of liquidity will give equities a solid boost, the Japanese yen will fall against the U.S. dollar. Also, a stronger-than-expected U.S. jobs report for the month of June released last Friday firmed up the so-far-sagging greenback. If the wining trend of the U.S. dollar continues, yen will likely shed strength against it.

Thus the dual doses of Japanese stimulus hope and a stronger greenback led the yen ETF CurrencyShares Japanese Yen ETF (NYSE:FXY) FXY to lose over 2.3% on July 11. The fund also shed about 0.01% after hours.

Japanese Stocks to Burst Out?

Since Japan investing is more of a yen story, any pullback in yen will give Japanese stocks ways to outperform. This is because Japan relies on exports considerably and a weaker currency always plays a vital role in helping Japanese companies operating abroad such as Toyota Motor Corp. (NYSE:TM) and Honda Motor Co Ltd (NYSE:HMC) in repatriating more money earned in dollar terms.

In November 2014, WisdomTree discussed in a note that ‘corporate profits in Japan are more important than GDP growth’ as Japanese earnings have skyrocketed 526% cumulatively from October 1994 to October 2014 while its average economic growth was negative 0.17% during this phase (read: Yen Gain Seems Overdone; Time for Japan ETFs?).

Hedged ETFs to Outperform

While all Japan ETFs were on a tear on Monday trading, the essential role was played by the bunch of currency-hedged Japanese ETFs thanks to a receding yen. These ETFs are in shambles from the year-to-date look and thus offer reasonable valuation and more upside potential from here (read: 1H ETF Asset Report: Gold Glows; Equities Fade).

Notably, the largest Japan ETF iShares MSCI Japan ETF EWJ added over 2.4% on July 11 while it added over 0.4% after hours. But several currency-hedged ETFs offered double the return of EWJ.

Below we highlight a few top-performing currency-hedged Japanese ETFs that may prove vital for investors seeking a Japanese flavor in their portfolio, yet looking to hedge against a falling currency.

WisdomTree Japan Hedged Financials ETF DXJF – Up 6.19% on July 11

The fund gives currency-hedged exposure to the financial companies of Japan. The fund yields about 2.34% annually (as of July 11, 2016). This much of yield is quite appealing from a Japanese ETF given that rock-bottom interest rates are prevailing in the economy.

In fact, yields across the developed nations are at nadir. As of July 11, yield on the benchmark U.S. 10-year Treasury notes was 1.43%, thus pushing investors hard to an investment like DXJF (read: Top and Flop ETFs of 1H).

iShares Currency Hedged MSCI Japan HEWJ–Up 5.05% on July 11

It is the currency-hedged version of EWJ. The fund yields about 1.94% and advanced about 1.3% after hours.

Deutsche X-trackers MSCI Japan Hedged Equity ETFDBJP – Up 4.97% on July 11, 2016

The fund follows the MSCI Japan US Dollar Hedged Index and the product yields about 1.37% annually.

WisdomTree Japan Hedged Equity ETFDXJ – Up 4.95% on July 11

The fund looks to track the WisdomTree Japan Hedged Equity Index which is designed to provide exposure to the Japanese equity market. The fund tacked on 0.5% gains after hours and yields about 2.29% annually.

WisdomTree Japan Hedged SmallCap Equity ETFDXJS – Up 4.83% on July 11, 2016

This ETF gives exposure to the currency-hedged small-cap stocks of Japan. The fund yields 2.19% annually.

WisdomTree Japan Hedged Quality Dividend Growth ETF JHDG– Up 4.30% on July 11

This fund offers the currency-hedged exposure to the dividend-paying stocks with growth characteristics. The fund yields 2.06% annually.

WisdomTree Japan Hedged Real Estate ETFDXJR – Up 4.12% on July 11

This currency-hedged fund provides exposure to Real Estate companies in Japan and yields 2.14% annually (read: Why is it the Best Time to Invest in Japan REIT ETF - DXJR?)