NEW YORK: The surge in Japanese stock prices and the plunge in the yen against the US dollar on Friday have bolstered the appeal of two currency-hedged Japanese equity exchange traded funds.
On a day when the benchmark Nikkei soared to a 5-1/2 year peak and the yen slumped to its lowest in more than four years versus the dollar, the WisdomTree Japan Hedged Equity Fund was up nearly 1.0 percent on Friday and more than 3.0 percent on the week.
The smaller, Deutsche Bank-owned DBX-trackers MSCI Japan Hedged Equity Fund was also up nearly 1.0 percent as well, rising 2.5 percent this week.
It's an environment that suits both ETFs, which hedge their yen exposure to Japanese stocks and take advantage of the pure equity returns in Japan. For the year, the DXJ has gained nearly 35 percent and the DBJP has gained more than 39 percent.
Japanese stocks tend to rise with a weaker yen as a weak yen boosts exporters profits and exporters are heavily weighted in the Nikkei index. The benchmark Nikkei index and yen, for instance, have a negative 10-year correlation of 60 percent, according to Reuters data.
Since the Bank of Japan announced its huge quantitative easing program on April 4, the Nikkei index has surged more than 15 percent. Since end-October, the Nikkei has soared a whopping 63 percent. However, the yen is down 28 percent since the end of October, which hurts foreign investors, making hedged ETFs more attractive.
Most fund managers expect further weakness in the yen that could spur more gains for Japanese stocks.
"If you take into account where dollar/yen was before the financial crisis, at 120 yen, and where it is right now, at 101.50, you know we still have a long way to go," said Jeremy Schwarz, director of research at WisdomTree in New York.
WisdomTree has attracted around $2.6 billion in inflows since the first quarter of the year, with total inflows now at $8.2 billion, according to the company's website.
Deutsche Bank's ETF has $72 million in assets.
The iShares MSCI Japan Index Fund, on the other hand, has also done well on a quarterly basis, up nearly 9.0 percent. On Friday, however, the iShares fund, owned by asset manager BlackRock, was little changed and slightly down on the week. It has gained nearly 21 percent in 2013.
EWJ tracks the MSCI Japan index, but it does not hedge its yen exposure. The fund said it stands by its strategy.
"Right now, we may have a weak yen, but what happens when the tide turns? We would like to give investors the flexibility of capturing the currency return as well," said Diane Hsiung, portfolio manager of the EWJ ETF, in San Francisco.
Since January, the iShares ETF has taken in about $4.7 billion in inflows, with total funds of $11.1 billion.
<Center><b><i>Copyright Reuters, 2013</b></i><br></center>
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