When looking overseas, investors typically take on more risk than they do with U.S. stocks. However, there is more to the international investing equation than just equity risk. There is currency risk. Among single-country, currency-hedged exchange-traded funds (ETFs), the WisdomTree Japan Hedged Equity Fund (NYSEARCA:DXJ) is one of the dominant names.
The backstory on DXJ is this: As more and more investors have become aware of the potentially erosive effects of currency risk, issuers have responded by launching scores of currency-hedged ETFs.
The primary advantage of currency-hedged ETFs is to protect and possibly benefit investors when the U.S. dollar is strong against another currency.
With roughly $8 billion in assets under management, DXJ is one of the largest currency-hedged ETFs of any variety.
DXJ Does What It’s Supposed to Do
DXJ provides investors with exposure to Japanese stocks while mitigating the impact of the yen’s gyrations against the dollar. Japan makes for one of the ideal markets for currency-hedged ETFs because the country’s export-driven economy, the world’s third-largest, prefers the yen to be weaker.
While no asset, including the yen, moves up or down in a straight line, Japan’s currency has been weakening over the past several years. In fact, the yen has been one of the weakest developed-market currencies over the past five years. During that period, DXJ has outpaced the largest Japan ETF trading in the U.S. (which is not currency hedged) by almost 50%. Additionally, DXJ has pummeled the MSCI EAFE Index of developed-market countries, which also is not currency-hedged.
“As we continue to observe both Japan’s commitment to the goal of ending deflation in addition to any new policies that evolve aimed at stimulating economic growth, we continue to believe that investors exposed to the yen may not be able to fully realize the equity market’s potential gains,” sponsor WisdomTree says.
At the sector level, DXJ is more than adequately levered to Japan’s export story, as consumer discretionary and industrial stocks account for almost half the ETF’s weight. Top holdings at present include Toyota Motor Corp (ADR) (NYSE:TM) and Japan Tobacco Inc (OTCMKTS:JAPAF).
Japan currently has negative interest rates, prompting the Bank of Japan to leave monetary policy alterations on hold during several of its most recent meetings. The central bank expects Japan’s economy to grow by 1.8% this year, up from an estimate of 1.5% in January.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.