DXJ and DBJP: Where do they invest?
The total number of holdings in the WisdomTree Japan Hedged Equity ETF (DXJ) is 329, whereas the total is 316 for the Deutsche X-trackers MSCI Japan Hedged Equity ETF (DBJP). The percentages of assets in the top ten holdings for DXJ and DBJP are 34.28% and 21.95%, respectively. DXJ invests in companies like Mitsubishi UFJ Financial Group (MTU), Japan Tobacco (JAPAY), and Canon (CAJ). Honda Motors (HMC) and SoftBank Corporation (SFTBY) are in DBJP’s portfolio.
Rebalancing takes places annually for DXJ in June, whereas it takes place monthly for DBJP on the last trading day of the month. Rebalancing uses the relationship between price movement and dividend growth. When the stock prices rise faster than the dividend growth, the weight of these stocks falls and the weight rises for stocks whose price movements lag dividend growth. The process also reassesses the companies regarding the criteria for potential inclusion in the ETF and also removes the constituents that no longer meet eligibility criteria. So overvalued stocks can be avoided and income-generating stocks can be added.
As we saw in earlier part of this series, managing risk is called “hedging.” As the WisdomTree Japan Hedged Equity Fund states in its prospectus, DXJ employs forward currency contracts and futures contracts to offset its exposure to the Japanese yen. This method minimizes currency fluctuation risk but doesn’t completely eliminate the impact of all fluctuations.
Similarly, as per the prospectus of the Deutsche X-trackers MSCI Japan Hedged Equity ETF, DBJP also hedges its currency exposure using currency forward contracts. The fund sells Japanese yen currency forwards at the one-month forward rate published by Reuters.
Let’s analyze the past performances of these funds in the next part of this series.