InvestmentNews INsider

The INsiderblog

InvestmentNews reporters offer their take on intriguing or controversial articles from around the web.

Japan's Catch-22 could snag U.S. investors

Asset buying to boost economy likely to hit yen, denting equity returns

Jan 29, 2013 @ 10:19 am

By Jason Kephart

The Bank of Japan's latest effort to stimulate the country's economy might be good for its stock market, but it leaves U.S. investors in a pickle.

The bank recently said it would begin an open-ended asset purchase program, similar to the Federal Reserve's third round of quantitative easing. While the move is likely to bolster risk assets, as QE3 did in the U.S., it will do so at the cost of a weakening yen.

And a depreciating yen will take a big bite out of any gains U.S. investors reap from Japanese stocks. That could be a big problem for advisers looking to make a tactical allocation to take advantage of the new policy.

That's because the majority of exchange-traded funds that focus solely on Japan don't hedge out the currency, and for good reason, said Matt Hougan, president of IndexUniverse LLC.

“Traditionally, you really want the currency,” he said. “That's where the majority of international stock's diversification comes from.”

The ferocity of Japan's pledge to devalue its currency makes it an unusual case, Mr. Hougan said.

“They've been very direct that it's the goal,” he said.

The $2.29 billion WisdomTree Japan Hedged Equity ETF (DXJ) is the only ETF currently available that hedges out yen exposure. Advisers also can hedge out yen exposure in the other available Japan-centric ETFs through futures contracts.

Since the yen started falling against the dollar in anticipation of Japan's quantitative easing program in mid-November, the hedged ETF has almost doubled the return of the unhedged ETFs.

From Nov. 14, when the yen's 20% slide vs. the U.S. dollar began, through Jan. 25, the WisdomTree ETF is up 26%. The $5 billion iShares MSCI Japan Index ETF (EWJ) is up 12.6% over the same period. Both funds have had more than $1 billion of inflows over the last two months, according to IndexUniverse data.

Of course, if the yen were to begin appreciating again, the WisdomTree ETF would more than likely be an ETF that underperforms. In 2010, for example, the yen rallied 10% against the dollar. WisdomTree's ETF lost almost 2% that year, while the iShares ETF gained 13%.

0
Comments

What do you think?

View comments

Recommended for you

Featured video

Events

Behind the scenes at Pershing Insite 2018

What goes on behind the scenes at one of the industry's biggest conferences? Join us for an all-access sneak peek!

Latest news & opinion

Mutual funds feel the pinch of platform fees

No-transaction-fee options are a big hit with investors, but funds wind up paying the costs — and passing them on.

Divorce reduces retirement readiness

The new tax law could increase financial challenges for divorced people, but planning opportunities abound.

Merrill Lynch fined $42 million for misleading customers

In addition to the practice of 'masking' trades, the wirehouse went to extremes to cover up the wrongdoing.

Advisers with billions in AUM leaving Wall Street

Merrill Lynch has seen two teams exit recently, each with more than $4 billion in client assets.

Wells Fargo weighs changes to wealth unit

The move would reflect the bank's effort to cut $4 billion in costs.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print