Why hedge funds show interest in Japanese ETFs

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Hedge funds show interest in Japanese ETFs

The report from Bank of America Merrill Lynch (or BoFAML) also highlighted that hedge funds owned exchange-traded funds (or ETFs) with exposure to Japan—like the iShares MSCI Japan ETF (EWJ). In this part of the series, we’ll highlight EWJ and the WisdomTree Japan Hedged Equity Fund (DXJ).

iShares MSCI Japan Index fund flows since Jan 2013  2014-09-23

DXJ and EWJ

DXJ tracks the performance of the WisdomTree Japan Hedged Equity Index. The Index and the fund are designed to provide exposure to equity securities in Japan. They also hedge exposure to fluctuations between the value of the U.S. dollar and the Japanese yen. DWJ’s top holdings are Toyota Motor (TM), Mitsubishi UFJ Financial Group (or MBFJF), and Japan Tobacco (or JAPAF). Hedge funds that have DXJ in their portfolio include Millennium Management, Oppenheimer & Co., and Harvest Capital.

EWJ tracks the investment results of an index that’s made up of Japanese equities. Its top holdings are TM, MBFJF, and SoftBank (or SFTBY).

Was Abenomics successful?

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Hedge funds prefer Japanese ETFs to express a bullish view on Abenomics. The current Japanese Prime Minister, Shinzo Abe, used a three-pronged approach—monetary easing, fiscal stimulus, and structural reforms—to bring the struggling Japanese economy back to normal. The approach, dubbed as “Abenomics” is an effort to pull the world’s third largest economy out of two decades of stagnation. It will expand the money supply, free up regulations, and encourage the yen to fall.

Market Realist noted that Abenomics’ strategy to pump money into the economy may have driven the yen down against the U.S. dollar. However, it didn’t have the desired impact on the economy.

Japan’s GDP contracted in 2Q14

This year Japan has seen its steepest fall in gross domestic product (or GDP) figures since early 2011. The decline was due to a hike in consumption tax from 5% to 8% in April. The hike caused a drag on consumer spending. The government didn’t expect that the increase in consumption tax would lead to one of the steepest contractions in the economy’s GDP. For more information, please read “Japan’s decrease in GDP shows the importance of consumer spending.”

BlackRock’s chief strategist, Russ Koesterich, noted in his latest Investment Directions, “global sentiment remains a major source of risk for both the yen and Japanese stocks, the United States’ and Japan’s divergent monetary policy paths will likely place downward pressure on the yen.” This should help support corporate earnings.

To learn more about what’s in store for the world’s third largest economy, read our Market Realist series, “Abenomics revisited: A guide to finding value in Japan.”

You can get exposure to Japanese stocks by investing in ETFs like EWJ or DXJ. These ETFs invest in top Japanese stocks like TM, Honda (HMC), and Sony (SNE).

In the next part of the series, we’ll discuss hedge funds’ interest in construction and agribusiness ETFs.

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