Japan's New Policies Driving ETFs

04/23/2013 9:00 am EST

Focus: ETFs

Japan has delved into the quantitative easing game, and that has prompted huge cash inflows into related ETFs, says John Spence of ETF Trends.

The two top-selling exchange traded funds in 2013 both invest in Japan. Investors who were underallocated to this market are using the ETFs for quick exposure to Japan amid unprecedented quantitative easing and inflationary policies.

WisdomTree Japan Hedged Equity (DXJ) has gathered $4.8 billion year to date, while iShares MSCI Japan (EWJ) has seen $3.3 billion move in the door, according to IndexUniverse flow data.

Some of the largest flows in the ETF industry are heading to areas where investors are underinvested—in Japan’s case because of hope of change in the country’s economic future after the easing measures designed to battle deflation, said BlackRock (BLK) CEO Larry Fink in a recent conference call.

DXJ is different from EWJ because the fund hedges its currency exposure to the Japanese yen. Therefore, DXJ will outperform EWJ when the yen weakens relative to the US dollar, and vice versa. The firm has also filed to launch a small-cap version of the highly successful DXJ.

Earlier this month, the Bank of Japan said it planned to double its holdings of government bonds and ETFs the next two years. Bank of Japan Governor Haruhiko Kuroda said he will do whatever it takes to meet the 2% inflation target.

DXJ has been a favorite among institutional investors positioning for higher Japanese stocks and a weaker yen. For example, Jeffrey Gundlach, manager of the DoubleLine Total Return Bond Fund (DBLTX), late last year said one of his high-conviction investing ideas was to buy Japanese stocks and short the yen. He predicted the Japanese government would debase the yen to stimulate the economy and the stock market.

Some Wall Street analysts say it’s still not too late to buy Japan ETFs. Analysts at Credit Suisse are advising clients to add to Japanese equity holdings, MarketWatch reports. They cited BOJ policy, economic growth, allocation shifts, restructuring potential, and valuations.

DXJ is up about 51% the past six months, while EWJ has rallied 29% over the same period.

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