Japan ETFs Poised for Possible Trump Trade Deal

Japanese equities may benefit from possible U.S.-Japan trade deal

Japanese equities have underperformed their U.S. counterparts year to date (YTD) in 2019 amid economic data pointing to a deteriorating economy in the Land of the Rising Sun. The country's leading and most respected stock index, the Nikkei 225 (^N225), is up 6.22% on the year, registering only about half of the gains that the S&P 500 Index has added over the same period.

President Trump's four-day state visit to Japan over the weekend may be just what's needed to give the country's stock market a boost in the coming months. Despite the U.S. president raising concerns of lopsided trade balance numbers between the two countries, he remained optimistic about working out a mutually beneficial trade deal with Japan.

"Trade-wise, I think we'll be announcing some things, probably in August, that will be very good for both countries," Trump said on Monday, per CNBC. "We'll get the balance of trade, I think, straightened out rapidly," he added.

Traders who anticipate a bounce in Japanese equities ahead of a possible U.S. trade deal later this summer can play the move using these three Japan exchange-traded funds (ETFs). Let's explore each fund in more detail and discuss several swing trading opportunities.

iShares MSCI Japan ETF (EWJ)

Launched back in 1996, the iShares MSCI Japan ETF (EWJ) seeks to provide similar investment results to the MSCI Japan Index. The benchmark tracks roughly 85% of the Japanese equity market. EWJ favors the industrial, consumer cyclical, and financial sectors, with respective allocations of 27.02%, 18.82%, and 14.75%. Key stocks in the portfolio include automotive manufacturer Toyota Motor Corporation (TM), multinational conglomerate SoftBank Group Corp. (SOBKY), and electronics giant Sony Corporation (SNE). With almost 8 million shares changing hands per day and an average spread of just 0.02%, the fund suits all trading styles. As of May 28, 2019. EWJ has an enormous asset pool of $14.27 billion, offers a 1.57% dividend yield, and is up 5.21% YTD.

EWJ shares formed an inverse head and shoulders pattern between October and March. The fund broke above the pattern's neckline in early April but has failed to materialize further gains. Instead, the price has retraced toward the chart formation's right shoulder, which has provided short-term technical support at $53. The ETF rallied from this level in Friday's trading session, which indicates that the price may have found a temporary bottom. Traders should look for a move up to $56, where the price encounters significant overhead resistance from a horizontal trendline that stretches back over the past 12 months. Place a stop-loss order beneath this month's low at $52.76.

Chart depicting the share price of the iShares MSCI Japan ETF (EWJ)

iShares Currency Hedged MSCI Japan ETF (HEWJ)

With assets under management (AUM) of $554.58 million, the iShares Currency Hedged MSCI Japan ETF (HEWJ) aims to provide returns that correspond to the MSCI Japan 100% Hedged to USD Index – effectively making it a hedged version of EWJ. The fund fully hedges its exposure to the Japanese yen relative to the U.S. dollar using currency forward contracts, making it an ideal instrument from traders who want to avoid currency risk. The ETF trades almost 600,000 shares per day and has a tight average spread of 0.03% that keeps trading costs minimal. HEWJ charges a competitive 0.48% management fee, pays a 1.23% dividend yield, and has a YTD return of 6.73% as of May 28, 2019.

The HEWJ chart closely mimics the EWJ cart due to the similarity of the tracking indexes. This month's pullback found support at $29.50 that roughly corresponds with the left shoulder of a six-month inverse head and shoulders pattern. The relative strength index (RSI) gives a reading below 50 that provides the price with ample room to make a run toward key resistance at the $31.50 level. Those who take a long position here should cut losses if the fund's price fails to hold the May 13 low at $29.30.

Chart depicting the share price of the iShares Currency Hedged MSCI Japan ETF (HEWJ)

WisdomTree Japan SmallCap Dividend Fund (DFJ)

The WisdomTree Japan SmallCap Dividend Fund (DFJ), created in 2006, attempts to follow the performance of the WisdomTree Japan SmallCap Dividend Index. The underlying index tracks dividend-paying small-cap stocks, weighting components based on cash dividends paid over the past calendar year. DFJ provides traders with solid exposure to the industrial and consumer cyclical sectors, with allocations of 26.56% and 22.22%, respectively. The ETF's top 10 holding account for just 6.01% of its portfolio, providing an even spread across a large basket of 810 stocks. DFJ has net assets of $592.01 million, yields 1.78% and is trading up 1.20% on the year as of May 28, 2019.

The ETF's price has traded within a four-point range for most of 2019. Price broke below this consolidation area in early May but has since stabilized. Friday's 1.79% jump may trigger a short squeeze that could see the fund test the top of the previous trading range and 200-day simple moving average (SMA) at the $69 level. Those who take the trade should position a stop under the recent low set on May 23 at $64.57. A fill at Friday's $65.80 closing price provides traders with a risk/reward ratio of 1:2.6 ($3.20/$1.23).

Chart depicting the share price of the WisdomTree Japan SmallCap Dividend Fund (DFJ)
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