Invest in Japan with This Top Ranked Hedged ETF - ETF News And Commentary

The Japanese economy, at present in a technical recession, could surprise soon with a turnaround. The economy shrank 1.9% annually in Q3 (sharper than expected) after plunging 7.3% in Q2. A hike in the consumer tax rate from 5% to 8% levied in April along with weak wage growth weighed sharply on consumer spending, which in turn took a large bite out of the nation's GDP.

Moreover, manufacturers' confidence fell in December and is likely to worsen, per Reuters, pointed to the anemic health of the economy. However, good things can come out of bad situations, and this was the case here in Japan. Following some of these sluggish numbers, the Central bank announced on October 31 that it would enhance its asset buying program to 80 trillion yen a year from the previous rate of 60–70 trillion yen.

The measure was taken to inject some fresh blood to the ailing economy. Though the latest move clearly pointed to a setback of 'Abenomics' – a monetary and fiscal firepower – introduced by Prime Minister Shinzo Abe, global markets seem to have ignored the apparent letdown and joined the rally to cash in on cheap money in the days to come (read: Introductory Guide to Japan ETF Investing).

If this was not enough, Shinzo Abe is allowing a delay in another consumption tax hike from 8% to 10%, which was slated for October 2015, and has just won a snap election as well, gaining nine seats in the Diet.

Moreover, we agree with many other analysts that apart from the sudden surge of easy money, the Japanese economy, which is the world's third largest net oil importer (per EIA), will attain big-time gains from the plunge in oil prices.

All these have taken the Japanese stock index – Topix – to the seven-year high level. Moreover, the massive stimulus program has devalued the currency to its seven-year low relative to the greenback. This was due to the continued ascent of the U.S. dollar (read: As Dollar Continues to Strengthen, Time for Hedged Currency ETFs?).

Consequently, investors seeking a Japanese flavor in their portfolio started investing in a hedged equity ETF in order to protect against a falling currency.  While the space sees quite a large number of hedged equity ETFs, a look at the top-ranked ETF in the Japan equity space would be the best way to capture the uptrend.

About the Zacks ETF Rank

The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box or asset class (Read: Zacks ETF Rank Guide). Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while these also receive one of three risk ratings, namely Low, Medium or High.

The aim of our model is to select the best ETFs within each risk category. We assign each ETF one of the five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other products with a similar level of risk.

For investors seeking to apply this methodology to their portfolio in the Japan equity space, we have taken a closer look at the top-ranked HEWJ. This ETF has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (see the full list of top ranked ETFs) and is detailed below:

Currency Hedged MSCI Japan ETF (HEWJ)

This fund looks to track the MSCI Japan 100% Hedged to USD Index, before fees and expenses. The fund gives exposure to the un-hedged iShares MSCI Japan Index Fund (EWJ), and then mitigates exposure to fluctuations between the value of the yen against the dollar.

Coming to EWJ, consumer discretionary, industrials and financials comprise more than three-fifth of total assets, each taking more-or-less one-fifth of the basket. Beyond this, information technology and consumer staples round out the top five, accounting for 11.5% and 6.4%, respectively. From an individual holdings perspective, the product puts roughly 22% of assets in the top 10 holdings.

While the ETF focuses on large caps that account for 90% share, mid cap and cash component take the remaining portion in the basket. The fund has a nice mixture of blend, growth and value securities, ensuring broad diversification in terms of style.

The product has so far managed assets of over $300 million. Its daily volume level has been moderate at 200,000 shares a day, suggesting that the bid/ask spreads are relatively tight and that total costs will not come in much higher than the 48 bps expense ratio.

Although the fund may not be a popular choice in the space, its performance has been quite remarkable. HEWJ has delivered a return of about 18.3% over the last 26 weeks. This was in stark contrast to EWJ which has nudged up 0.2% during the same time frame (read: ETFs to Watch on Japan Recession Shocker and Snap Election).

Thanks to this decent track and some fundamental tailwinds, this top ranked ETF could be a great pick for many investors interested in the Japan ETF rally, but are still worried about the country's currency issues.

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ISHA-CH MS JAP (HEWJ): ETF Research Reports
 
ISHARS-JAPAN (EWJ): ETF Research Reports
 
WISDMTR-J HEF (DXJ): ETF Research Reports
 
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