Market Overview

Japan Hedged ETF Gets Another Supporter

The WisdomTree Japan Hedged Equity Fund (NYSE: DXJ), already one of 2013's best ETFs both in terms of performance and asset-gathering, can add another superlative to its list as S&P Capital IQ rated the fund Overweight in a new research note.

Buoyed by Japanese Prime Minister Shinzo Abe's pressure on the Bank of Japan to weaken the yen, the WisdomTree Japan Hedged Equity Fund was up more than eight percent year-to-date at the start of trading Thursday. Over the past 90 days, the ETF has surged by about 30 percent.

In January, DXJ hauled in $1.2 billion in new assets, making it one of the best ETFs by that metric last month, according to Morningstar. DXJ had just over $500 million in assets under management in early December, but entered trading today with over $2.8 billion in AUM.

"The yen has been falling since mid-November, as investors kept betting Japanese Prime Minister Shinzo Abe would push the Bank of Japan (BoJ) into more aggressive monetary easing to beat deflation. In addition, the government has undertaken additional fiscal stimulus to stoke growth, further pressuring the currency. From November 13 through February 5, the yen has declined nearly 18%, and an 8.2% decline year to date through February 5," said S&P Capital IQ in the note.

A large part of DXJ's allure has been its ability to hedge exposure to fluctuations between the value of the U.S. dollar and the Japanese yen. While DXJ has gained 30 percent over the past 90 days, the rival iShares MSCI Japan Index Fund (NYSE: EWJ), which does not hedge USD/JPY fluctuations, is up just 11.8 percent.

"The daily correlation between Japanese equities and the dollar/yen exchange rate is 87%, (which) stems from large export manufacturers in the technology, industrials, and consumer discretionary sectors comprising roughly half of Japan's total equity market cap," according to S&P Capital IQ.

The correlation between Japanese stocks and price action in USD/JPY speaks to another unique attribute possessed by DXJ. That being the ETF's constituents are Japanese stocks that derive the bulk of their revenue outside of Japan, an added bonus when considering Japan's domestic economy is still struggling and that the weaker yen can provide immediate benefits to the country's exporters.

"We expect Japan's equity markets to underperform in 2013 as increasing government fiscal stimulus, BoJ quantitative easing, and increased investor risk appetite stemming from improving global growth serve to weaken the yen's safe-haven appeal, diluting U.S. dollar-denominated Japanese performance," S&P said in the note.

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