Get Bearish on Japan

In the immortal words often attributed to Sir Isaac Newton, “What goes up must come down.” Japan has been one of the hottest markets of 2013, but at some point Prime Minister Shinzo Abe’s policy of weakening the yen to spur economic growth in the country is likely to run its course and the Japanese market’s rise will fizzle out.

If the Japanese stock market retreats, one exchange-traded fund (ETF) that you may want to consider is the Direxion Daily Japan Bear 3X Shares (JPNS), which is designed to capitalize on any drop in that market. With the Japanese market’s recent rise, the strongly bearish JPNS has been out of favor with investors. But the fund is worth keeping in mind if the Japanese market reverses.

JPNS is a non-diversified fund which seeks, before fees and expenses, daily investment results that match 300% of the inverse of the performance of the MSCI Japan Index. This index measures the performance of the large- and mid-cap segments of Japan’s equity market.

Since its launch on June 26, 2013, JPNS has fallen 29.41%. If the Japanese market continues to do well, this ETF will keep falling. However, since this fund does the opposite of whatever Japan’s economy does, any Japanese market dips turn into profits for JPNS. As a triple-leveraged fund, reflected by the chart below, JPNS can be very volatile.

As a fund intended to triple the inverse of the MSCI Japan Index, JPNS does not have allocations to any sectors or individual companies. Instead, to achieve its results, it invests its assets in futures contracts; options on securities, indices and futures contracts; equity caps, floors and collars; swap agreements; forward contracts; short positions; reverse repurchase agreements; other ETFs; and other financial investments.

The land of the rising sun continues to find profit in its “Abenomics” policy, but a downward reversion to the mean is likely in the future. When that dusk hits Japan, the volatile Direxion Daily Japan Bear 3X Shares (JPNS) could be a good way for opportunistic investors to capitalize on any Japanese declines.

If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my Successful Investing newsletter. As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an e-mail. You may see your question answered in a future ETF Talk.

In case you missed it, I encourage you to read my e-letter articles from previous weeks about long Japanese ETFs, JPNL and DXJS. I also invite you to comment about my column in the space provided below