Exchange Traded Funds (ETFs)

ETF Talk: Depressed Yen Provides Potential High Returns on Equity

The WisdomTree Japan Hedged Equity Fund (DXJ) is an exchange-traded fund (ETF) that tracks an exporter-focused, dividend-weighted index of Japanese stocks that are hedged to protect against currency fluctuations between the U.S. dollar and the Japanese yen.

DXJ has a specific investment thesis, with an “Abenomics,” dividend-focused portfolio that is positioned to gain from increased economic activity in Japan amid its weakening currency. The ETF selects export-oriented, dividend-paying Japanese firms, weights them by dividends and then hedges its yen exposure.

The fund was not always currency-hedged or export-oriented. At launch, DXJ tracked a dividend-weighted index, without adding a currency hedge until 2010 and shifting the portfolio toward exporters in 2012. Its dividend-oriented selection and weighting produce one of the segment’s highest yields and a tilt toward large-caps.

Although the fund’s fee is not cheap, it is reasonable given the complexity of the portfolio. However, wobbly tracking stats point to real-world holding costs that are often significantly higher than the fee. It is worth noting that the fund has made capital gains distributions in the past — a tax hit for investors. Still, DXJ is one of the most-liquid funds in the segment and is easy to trade for both small and large investors.

The top five sectors for this ETF include consumer cyclicals, industrials, financials, technology and basic materials. Its top five holdings are in Toyota Motor Corp. (NYSE:TM), 4.99%; Japan Tobacco Inc. (OTC:JAPAY), 3.66%; Mitsubishi UFJ Financial Group (NYSE:MUFG), 3.43%; Sumitomo Mitsui Financial Group (NYSE:SMFG), 3.17%; and Nissan Motor Co. (OTC:NSANY), 2.85%.

Chart courtesy of StockCharts.com

The fund currently has $3.5 billion in net assets, $107.13 million average daily volume and an average spread of 0.02%. It also has an expense ratio of 0.48%, which means it is slightly more expensive to hold in comparison to other ETFs.

Sustained monetary-easing in Japan has kept the yen at weakened levels. However, since Japan is an export-driven economy, this likely would propel stock values up. By hedging exposure to the yen, the WisdomTree Japan Hedged Equity Fund (DXJ) provides return potential from Japanese equities in a depressed yen environment.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.

Jim Woods

Jim Woods is a 20-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor. Jim is the editor of Intelligence Report, Investing Edge, the Bullseye Stock Trader, and The Deep Woods (formerly the Weekly ETF Report). His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. His articles have appeared on many leading financial websites, including StockInvestor.com, InvestorPlace.com, Main Street Investor, MarketWatch, Street Authority, Human Events and many others. Jim formerly worked with Investor’s Business Daily founder William J. O’Neil, helping to author training courses in the CANSLIM stock-picking methodology. The independent firm TipRanks rates Jim the No. 3 financial blogger in the world (out of more than 6,000). TipRanks calculates that, since 2012, he's made 361 successful recommendations out of 499 total, earning a success rate of 72% and a +15.3% average return per recommendation. He is known in professional and personal circles as “The Renaissance Man,” because his expertise includes such varied fields as composing and performing music; Western horsemanship, combat marksmanship, martial arts, auto racing and bodybuilding. Jim holds a BA in philosophy from the University of California, Los Angeles, and is a former U.S. Army paratrooper. A self-described “radical for capitalism,” he celebrates the virtue of making money from his Southern California horse ranch.