ETF Talk: Depressed Yen Provides Potential High Returns on Equity

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker, financial journalist, and money manager.

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.

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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.

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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%.

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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.

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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.

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