Even against the backdrop of a slightly stronger yen, Japanese equities have been solid performers this year. For example, the MSCI Japan Index is up more than 14% year to date, and more gains could be ahead for Japanese stocks if the dollar rallies against the yen. That scenario could be materializing. The U.S. Dollar Index is up 1.2% over the past month, while the yen is lower by 2.7% against the dollar. Some Japan exchange-traded funds (ETFs) are bound to benefit from a weaker yen, while others are already strutting their stuff, including the WisdomTree Japan SmallCap Dividend Fund (DFJ).

DFJ is one of the small-cap ETFs cementing the notion that smaller international stocks are proving to be better bets than their U.S. counterparts this year. The WisdomTree ETF is up more than 21% year to date and currently resides near record highs, nearly doubling the gains of the Russell 2000 Index. Said another way, DFJ is proving more than durable at a time when the yen is not as weak as many international investors may be hoping for. (See also: A Rising ETF for the Land of the Rising Sun.)

"The U.S. 10-Year Treasury note began 2017 at approximately 2.4%. On Sept. 25, 2017, it was at about 2.2%, meaning that U.S. yields have actually declined at the 10-year point on the yield curve," said WisdomTree in a recent note. "A direct contributor to this move is the 4.7% appreciation of the yen versus the U.S. dollar. Of course, an appreciating yen is not the best condition for Japan's exporters (focused upon in the WisdomTree Japan Hedged Equity Index), but it draws our attention to another part of Japan's market – the small caps."

DFJ allocates over 48% of its combined weight to the industrial and consumer discretionary sectors. With Japanese small caps, those sectors give investors some exposure to Japan's export story while still providing leverage to the recovering domestic economy. Additionally, valuations on Japanese small caps are far more compelling than what investors will find with U.S. equivalents, as DFJ's price-to-earnings ratio implies a significant discount to the Russell 2000. (See also: Small-Caps ETFs Look Good – Outside the US.)

"At a time when the forward P/E ratio of the Russell 2000 Index is above 30x, the fact that the WisdomTree Japan SmallCap Dividend Index is trading at a forward P/E ratio of less than 13.0x makes it additionally interesting," said WisdomTree. Over the past three years, DFJ has a compound annual growth rate (CAGR) of 15.6%, or 230 basis points ahead of the Russell 2000. (See also: Japan ETFs Soar, but Investors Aren't Interested.)

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