Japan is an interesting situation that doesn’t get nearly as much attention as it did in the past. If you think back to the 1980s, Japan was buying up property all over the U.S. and appeared to be the new economic powerhouse. Then Japan’s real estate market tumbled and soon everything else with it.
Japan has been dealing with deflation even since. It attempted austerity. In recent years, it has been all about Abenomics. The problem is that you can’t artificially pump up an economy and expect it to be sustainable because eventually the debts used will come due, which makes the situation even worse than it was originally. (For more, see: The Fundamentals of Abenomics.)
The tricky part is that you don’t know how long artificial stimulus will last. Since Japan has the second-oldest population in the world, it’s will be difficult for this nation to get back to sustainable growth. The consumer spending simply won’t be there. One factor can’t be ignored. Japanese companies are highly disciplined and for the most part, are not big on taking on a lot of debt. There is still long-term hope. For the moment, and for the foreseeable future, you have a country based on heavy imports, deflation, and highly aggressive monetary policy. This has even gotten to the point of negative interest rates, which has not been effective.
The following are exchange-traded funds (ETFs) to go long on Japan or initiate a position in an inverse Japan ETF.
Long Japan ETFs
iShares MSCI Japan (EWJ) tracks the performance of the MSCI Japan Index, which consists of large-cap, mid-cap and small-cap companies. The index is weighted toward discretionary, financials and industrials. EWJ is highly liquid with an average daily trading volume north of 50 million. The expense ratio is slightly higher than the ETF average at 0.48%. Over the past year, EWJ has slid 14.61%, as well as 32.87% since its inception on March 12, 1996. EWJ currently yields 1.34%. (For more, see: Top 5 Japan ETFs.)
WisdomTree Japan Hedged Equity ETF (DXJ) tracks the performance of the WisdomTree Japan Hedged Equity Index. DXJ offers plenty of liquidity with an average daily trading volume north of seven million. The expense ratio of 0.49% is once again slightly higher than the ETF average. DXJ has depreciated 29.46% over the past year, as well as 24.41% since its inception on June 6, 2006. It currently yields 1.64%.
Deutsche X-trackers MSCI Japan Hedged Equity Fund (DBJP) tracks the performance of the MSCI Japan U.S. Dollar Hedged Index, which makes it similar to DXJ. The expense ratio is lower at 0.45%, the yield is higher at 4.05% and the long-term performance is better. While DBJP has depreciated 27.36% over the past year, it has appreciated 23.17% since its inception on June 9, 2011. DBJ offers liquidity with an average daily trading volume of 753,176.
iShares Currency Hedged MSCI Japan (HEWJ) tracks the performance of the MSCI Japan 100% Hedged to USD Index. This makes it similar to the two ETFs listed above. With an average daily trading volume above 1.1 million, HEWJ offers plenty of liquidity. HEWJ has an expense ratio of 0.53%. It has depreciated 25.68% over the past year, as well as 2.09% since its inception on January 1, 2014. It currently yields 1.33%. (For more, see: 5 Popular Japan ETFs in 2016.)
WisdomTree Japan SmallCap Dividend ETF (DFJ) tracks the performance of the WisdomTree Japan Small-Cap Dividend Index, which consists of dividend-paying small-cap companies in Japan. DFJ isn’t as liquid with an average daily trading volume of 100,000. It also has a higher expense ratio of 0.59%. On the other hand, DFJ has only slid 3.65% over the past year and has appreciated 3.50% since its inception on June 6, 2016. It currently yields 1.26%.
First Trust Japan AlphaDEX ETF (FJP) tracks the performance of the NASDAQ AlphaDex Japan Index, which uses the AlphaDex selection methodology to choose stocks in the NASDAQ Japan Index. FJP’s average trading volume is close to 100,000. The expense ratio is the highest of the long Japan ETF bunch at 0.80%. FJP has depreciated 14.96% over the past year and appreciated 4.63% since its inception on April 4, 2011. FJP currently yields 0.89%.
Short Japan ETF
ProShares UltraShort MSCI Japan (EWV) tracks 2x the inverse performance of the MSCI Japan Index. EWV is not very liquid with an average daily trading volume of just 22,742, but that has the potential to change quickly since it's one of the few ways for traders to short Japan. As an inverse ETF, the expense ratio is high at 0.95%. EWV has appreciated 14.41% over the past year, but has been crushed to the tune of 81.82% since its inception on November 6, 2007. Inverse ETFs are not something you want to hold for too long.
The Bottom Line
Japan has to deal with an aging population, deflation, ballooning debts and negative interest rates. Fundamentally, this doesn’t make for an appealing investment situation at this time. (For more, see: JSC vs. EWJ: Comparing Japan ETFs.)
Dan Moskowitz does not have any positions in the ETFs mentioned in this article.