Why currency-hedged ETFs make sense
Currency-hedged ETFs (exchange-traded funds) provide exposure to an investment product. At the same time, these ETFs hedge against the impact of currency volatility on the product’s returns.
Various investment products provide exposure to Japanese equity (EWJ), while hedging the investor’s exposure to the volatile currency. For example, the iShares Currency Hedged MSCI Japan ETF (HEWJ) tracks the performance of large- and mid-capitalization Japanese equities. Investments in this ETF provide a hedge against fluctuations between the value of the Japanese yen (YCS) and the US dollar (UUP).
Yen-hedged ETFs deliver good returns
HEWJ has returned about 14% so far this year and about 34.5% over the past 12 months.
The WisdomTree Japan Hedged Equity ETF (DXJ) is another more popular ETF in the US. It gives exposure to Japanese equity while at the same time hedging exposure to currency fluctuations relating to the Japanese yen against the US dollar. DXJ has returned 14.75% YTD (year-to-date) and 23.26% over the last 12 months.
Similarly, the Deutsche X-trackers MSCI Japan Hedged Equity ETF (DBJP) has returned 13.75% YTD and 23.27% over the year.
Can Abenomics justify the current fiscal constraint facing Japan?
With most of the country’s savings being diverted toward servicing its mammoth debt, investor concerns over growth drivers in the economy seem genuine. What’s more, Japan’s ageing population erodes confidence in savings-driven growth over the coming years. Really, Japan has limited recourse.
Abenomics involves a “three arrow” approach:
- a big government spending package
- a 2% inflation rate target, realized with a massive money-printing scheme
- a programme of business reforms
So far, the approach has worked well for Japan. The yen has depreciated, and equities have surged, making Japanese products more attractive in foreign markets and Japanese equities more attractive to investors.
Meanwhile, Prime Minister Shinzo Abe’s December 2014 decision to delay a consumption tax hike—from 8% to 10%—has put budgetary constraints on the economy. The government’s fiscal objective to eliminate the primary budget deficit by 2020, seems farfetched now. Can Abenomics justify such constraints?
For more on this topic, you may want to read Currency war: Did it boost growth in Japan?