After outflows, Wisdom Tree doubles down on Japan

ETF firm launches five funds to offer pure-play exposure to Japanese companies

Apr 8, 2014 @ 11:57 am

By Trevor Hunnicutt

What do you do if your signature investment product — in this case, an ETF offering novel exposure to Japanese companies — suffers $611 million in outflows in one month?

If you are WisdomTree Investments Inc., you double down.

The exchange-traded fund sponsor announced Tuesday the launch of a series of five new ETFs designed to capture the possibilities that Japanese companies will outperform. But the funds come as their popular predecessor is taking a hit and the International Monetary Fund lowers its growth forecast for the world's third-largest economy.

That doesn't faze WisdomTree research director Jeremy Schwartz, who describes investing in Japan as the investment idea in which he has the highest conviction.

“Over the next three to five years, Japan is going to have the highest returns in the world,” he said, adding that the country benefits from “the most supportive central bank in the world,” which has pumped money into, among other assets, ETFs and real estate.

“Imagine if Janet Yellen said, 'I'm not just buying bonds, I'm buying the S&P 500.' That's what Japan is doing,” Mr. Schwartz said.

Japanese companies are also undervalued, he said.

The new funds, which have net expense ratios of 0.43% and are listed on NYSE Arca, offer sector exposure to real estate (DXJR), financials (DXJF), technology, media and telecommunications (DXJT), health care (DXJH) and capital goods (DXJC).

Those sectors could benefit from fiscal and monetary policy or exports as the country's three-pronged reforms, called Abenomics after Prime Minister Shinzo Abe, lower the value of the yen, Mr. Schwartz said.

Like the Japan Hedged Equity Fund (DXJ), the new funds are currency-hedged, meaning that they are designed to offer pure-play exposure to Japanese companies but not the Japanese currency, the yen.

That fund has been a huge success for the United States' fifth-largest ETF sponsor, attracting nearly $10 billion in flows last year. The fund now accounts for about a third of the company's ETF assets.

But the Japan Hedged Equity Fund had a tough March, with multimillion-dollar outflows decreasing the fund's total assets to $11.4 billion.

The fund was up more than 41% last year, sidestepping a falling yen, but it lost nearly 7% this year through the end of March, according to Morningstar Inc.

The Japanese economy faces serious head winds, including high levels of public debt. The International Monetary Fund Tuesday lowered its forecast for Japanese growth this year to 1.4%.

“We've avoided Japan, and it proved to be a disadvantage last year to avoid Japan,” said Adam Thurgood, a partner with HighTower Las Vegas. “WisdomTree obviously hit a home run with its currency-hedged Japanese ETF last year, but I have my doubts that the Japanese equity market will continue to outperform in the years ahead, due to their increasingly problematic debt situation.”

But investors who do want to invest in Japan should hedge their currency risk “because Abenomics is clearly bad for the yen," Mr. Thurgood said.

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