S&P: Bullish on Japan ETFs (DXJ, EFA, EWJ)
Despite trying times for international equities this year, Japanese stocks have held up relatively well compared to other global markets, perhaps indicating that investors should consider plays in the world's third-largest economy.
"As recovery and reconstruction proceed, investors may want to look at the dominant developed Asian equity issuer," according to S&P Capital IQ. In a new research note, S&P Capital said "ETFs offer investors a compelling way to gain exposure to Japan."
In the research note, S&P highlights three ETFs, including two Japan-specific plays, that the firm has Overweight ratings on. The iShares MSCI Japan Index Fund (NYSE: EWJ), with almost $4.9 billion in assets under management, is the largest Japan ETF and is one of the three to earn an Overweight rating from S&P.
"While the ETF is the most expensive of the three (0.51 percent gross expense ratio), five of the six top-10 holdings with S&P Fair Value rankings are considered undervalued according to that metric, and four top-10 holdings have an above-average (A- or higher) S&P Quality Rank metric," S&P said in the note.
Home to 312 stocks, EWJ's top-10 holdings include Toyota (NYSE: TM), Mitsubishi UFJ Financial, Honda (NYSE: HMC) and Canon. Industrials represent almost 25 percent of EWJ's weight while consumer cyclical names receive an allocation of more than 18 percent. EWJ is higher by a tenth of a percent year-to-date.
S&P also has an Overweight rating on the Vanguard MSCI Pacific ETF (NYSE: VPL). The Vanguard MSCI Pacific ETF is not a pure play Japan ETF, but the fund does devote 60 percent of its weight to Asia's second-largest economy. VPL also offers exposure to Australia, Hong Kong and Singapore.
"Of the fund's top-10 holdings, seven have above-average S&P Quality Rankings, three of those being Japanese equities, and of the top holdings that have an S&P Fair Value rank, the only two considered undervalued are Japanese stocks," S&P said.
VPL charges just 0.14 percent per year, making it less expensive than 90 percent of comparable funds, according to Vanguard's web site.
The WisdomTree Japan Hedged Equity Fund (NYSE: DXJ) also garnered an Overweight rating from S&P. DXJ is designed to provide investors exposure to Japanese equities while hedging against dollar/yen fluctuations. The yen hedge has proven popular with investors as DXJ has almost $622 million in assets under management. In addition, the fund has a distribution yield of 3.95 percent and has risen 2.1 percent year-to-date.
DXJ, which charges 0.48 percent per year, holds over 650 stocks and allocates a combined 38 percent of its weight to industrial and financial services names.
The The iShares MSCI EAFE Index Fund (NYSE: EFA) is another ETF with significant Japanese exposure. The fund allocates 21.4 percent of its weight to Japan and is rated Overweight by S&P.
In a market environment that has left investors wary of risk, Japanese equities may be another safe option beyond the U.S.
"Japan tends to act as a safe haven, outperforming when risk aversion rises so it's not a bad place to hide right now as Europe's debt crisis persists, BRIC economies slow and the U.S. fiscal cliff looms," S&P said.
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