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Japan ETFs in Focus as GDP Grows for 8 Straight Quarters

GDP growth in the world’s third-largest economy slowed in Q4, keeping with the initial estimate. It nevertheless grew for eight consecutive quarters, the longest streak since a 12-quarter expansion ended in 1989, the period of Japan’s economic bubble.

Into the Headlines

Japan’s economy grew at an annualized 0.5% in Q4 compared with 2.2% in the prior quarter. The rate of growth was below a median estimate of 0.9%, per Cabinet Office data. Bank of Japan’s easy money policies and prime minister Shinzo Abe’s stimulus measures are driving economic growth.

Coming to the other drivers of economic growth, accounting for two-thirds of GDP, private consumption grew 0.5% compared with a contraction of 0.6% in the previous quarter and also surpassed expectations of 0.4% increase. Moreover, capital expenditure rose 0.7% sequentially in the quarter compared with analyst expectations of a 1.1% increase. Capital expenditure grew for the fifth straight quarter, driving optimism on higher business investment.

From a trade perspective, Japan’s net trade balance negatively impacted GDP to a certain extent, as exports grew 2.4% in the quarter compared with a 2.9% increase in imports owing to strong domestic demand. However, solid demand across the globe has been a positive for Japan’s trade (read: Japan ETFs in Focus on Strong Economic Data).

Moving on to manufacturing, Japan’s manufacturing activity in January expanded at its fastest pace in almost four years, per the Nikkei Japan Manufacturing Purchasing Managers Index (PMI). PMI increased to 54.8 in January compared with 54.0 last December. The index remained above the 50 threshold that separates contraction from expansion for the 17th consecutive month.

Economic Scenario and Risks Involved

A stronger yen is a negative for manufacturers, as it diminishes the appeal of Japanese products to foreigners and leads to a fall in exports. Thus, the recent strength in yen has been weighing on Japanese stocks. For instance, CurrencyShares Japanese Yen Trust FXY increased 1.5% in the past five days. However, the expected strengthening of the greenback might weigh on yen in the near future.

Japan is also subject to geopolitical risks, as Asian markets continue to suffer from massive volatility due to North Korea’s actions. Although North Korea’s participation in the Winter Olympics has been raising hopes that tensions will ease, some analysts are predicting that North Korea is aiming to create a wedge between South Korea and the United States, thereby worsening the scenario.

Increased geopolitical uncertainty makes us look for currency-hedged ETFs focused on providing exposure to Japan (see Asia-Pacific (Developed) ETFs here).

WisdomTree Japan Hedged Equity Fund DXJ

This fund is suited for investors looking for a broad-based exposure to Japan’s economy. It seeks to invest in dividend-paying companies with an export tilt.

The fund has AUM of $7.9 billion and charges a fee of 48 basis points a year. From a sector look, Consumer Discretionary, Industrials and Information Technology are the top three allocations of the fund, with 25.5%, 22.8% and 13.1% exposure, respectively (as of Feb 13, 2018). Toyota Motor Corp, Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group are the top three holdings of the fund, with 5.7%, 3.7% and 3.3% exposure, respectively (as of Feb 13, 2018). It has returned 11.7% in a year. DXJ has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.

Deutsche X-trackers MSCI Japan Hedged Equity ETF DBJP

This fund seeks to provide exposure to Japanese equities with a large-cap focus, while hedging away the currency risk.

The fund has AUM of $1.6 billion and charges a fee of 45 basis points a year. From a sector look, Industrials, Consumer Discretionary and Technology are the top three allocations of the fund, with 20.8%, 19.9% and 12.5% exposure, respectively (as of Feb 12, 2018). Toyota Motor Corp, Mitsubishi UFJ Financial Group and Softbank Group Corp are the top three holdings of the fund, with 4.8%, 2.3% and 1.8% exposure, respectively (as of Feb 12, 2018). It has returned 12.0% in a year. DBJP has a Zacks ETF Rank #1 with a Medium risk outlook.

iShares Currency Hedged MSCI Japan ETF HEWJ

This fund is the currency-hedged equivalent of EWJ. It seeks to provide exposure to Japanese equities with a large-cap focus, while hedging away the fluctuations between the USD and JPY.

The fund has AUM of $1.0 billion and charges a fee of 49 basis points a year. From a sector look, Industrials, Consumer Discretionary and Financials are the top three allocations of the fund, with 21.4%, 20.6% and 12.7% exposure, respectively (as of Feb 12, 2018). Toyota Motor Corp, Mitsubishi UFJ Financial Group and Softbank Group Corp are the top three holdings of EWJ, with 5.0%, 2.4% and 1.9% exposure, respectively (as of Feb 12, 2018). It has returned 12.4% in a year. HEWJ has a Zacks ETF Rank #1 with a Medium risk outlook.

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CRYSHS-JAP YEN (FXY): ETF Research Reports
 
WISDMTR-J HEF (DXJ): ETF Research Reports
 
ISHA-CH MS JAP (HEWJ): ETF Research Reports
 
DEUTS-XT MS JPN (DBJP): ETF Research Reports
 
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