Market Overview

Japan ETFs Look For Q4 Rallies

Japan ETFs Look For Q4 Rallies

Japanese stocks haven't been immune to the downside experienced this year by ex-U.S. developed markets equities. In fact, Japan is one of the worst ex-U.S. developed markets offenders as highlighted by a year-to-date loss of 5.62 percent for the MSCI Japan Index.

While Japanese stocks are among this year's laggards, some market observers believe stocks in Asia's second-largest economy could see some fourth-quarter upside if professional investors step into the arena.

What Happened

Investors looking to participate in a potential resurgence for Japanese stocks can consider exchange traded funds, particularly low-cost fare if the intended holding period is expected to be lengthy.

The JPMorgan BetaBuilders Japan ETF (CBOE: BBJP) is one of the newest U.S.-listed Japan ETFs and has rapidly become the low-cost leader in this category, indicating the rookie fund could be the beneficiary of some good timing.

“Professionals believe that Japanese equities are a 4th quarter “alpha” trade and have a strong desire to own it when the dust settles,” said Rareview Macro founder Neil Azous in a note out Monday.

Why It's Important

BBJP is four months old and already has $1.92 billion in assets under management (as of Oct. 12), easily making it one of this year's most successful new ETFs. The new ETF tracks the Morningstar Japan Target Market Exposure Index. BBJP is not currency hedged.

BBJP is home to 385 stocks, significantly more than the roughly 320 found in the MSCI Japan Index. Among the catalyst prompting some investors to consider Japanese stocks in bullish fashion are compelling valuations relative to U.S. equities and the still accommodative Bank of Japan.

Although it does hedge dollar/yen risk, BBJP is more than adequately levered to Japan's export story as the industrial and consumer discretionary sectors combine for about 40 percent of the ETF's weight.

What's Next

Cash-rich Japanese companies could spend some of that cash on buying back depressed shares and boosting dividends, catalysts that could lift the country's stocks into year-end.

“Stock market decline and trends from previous first-half results may inspire companies to increase dividends and buybacks. 380 companies are planning or are expected to raise dividends for 5th year in a row. Buybacks may increase against the backdrop of 'abundant cash and newly-revised corporate governance code,” said Azous, citing Goldman Sachs.

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