DXJ: A Currency-Hedged Allocation To Japan

seekingalpha02-08

WisdomTree Japan Hedged Equity Fund provides exposure to dividend-paying Japanese equities, with a tilt towards exporters.We think Japan is currently the place to be for a non-U.S. equity allocation ...

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href=https://seekingalpha.com/article/4668519-dxj-a-currency-hedged-allocation-to-japan><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>WisdomTree Japan Hedged Equity Fund provides exposure to dividend-paying Japanese equities, with a tilt towards exporters.We think Japan is currently the place to be for a non-U.S. equity allocation ...</p>\n\n<a href=\"https://seekingalpha.com/article/4668519-dxj-a-currency-hedged-allocation-to-japan\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"FLJP","symbol_name":"Franklin FTSE Japan ETF","start_time":0,"source_url":"https://seekingalpha.com/article/4668519-dxj-a-currency-hedged-allocation-to-japan","article_id":"2409797252","we_media_id":null,"thumbnails":[],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2409797252","pubTimestamp":1707390918,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking 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encouraging companies of listed shares to improve corporate governance and capital efficiency.DXJ has led the pack in its category for returns over the last five years.However, its shares seem a bit inflated right now, so I’m giving DXJ a “hold” rating.Editor's note: Seeking Alpha is proud to welcome The Country Investor as a new contributor. It's easy to become a Seeking Alpha contributor and earn money for your best investment ideas. Active contributors also get free access to SA Premium. Click here to find out more » gyro/iStock via Getty Images The WisdomTree Japan Hedged Equity Fund (NYSEARCA:DXJ) is a seasoned ETF in the Japanese equity space and outperforms its peers time and time again. It also pays a nice reliable dividend, among other attributes. However, its shares have been on a run recently and are currently overpriced so for now I'm rating it a \"hold.\" Japan, Japan, Japan In 2020, it came to light that Warren Buffett bought cheap Japanese debt during the pandemic to finance the purchase of shares in five local trading companies, and he's probably not done. His latest reported yen-denominated bond sale occurred in November 2023 and netted Berkshire Hathaway around $827 million. No one knows for sure what he plans to do with the cash but recent history tells us he'll probably up his stakes, as he already has done, in the Japanese stock market. Clearly, Mr. Buffett sees Japan as a wise investment opportunity and if we should follow anyone for investment advice, he would be our guy. And we wouldn't be the only one heeding his counsel. His moves bring other investors, domestic and international, into the market and that can only be a positive for stocks in Japan. Take a look at the stock returns of those companies since Buffett disclosed his stake: The Wall Street Journal; FactSet In terms of equity fundamentals, Japanese stocks are heading in the right direction. Margins are improving and the Tokyo Stock Exchange is initiating moves to improve corporate value among its listed shares. Case in point: Toyota Motors, despite being the epitome of Japanese manufacturing, had fallen prey to lax oversight and poor corporate governance through its network of cross-shareholding. As a result of the TSE's initiatives, management has announced plans to sell off its interests in two suppliers and reduce its cross-shareholdings to zero. We see Toyota as an esteemed leader whose moves will encourage other Japanese conglomerates to follow in its footsteps and create a clean slate for everyone, not least of all investors. A by-product of these recent standards is a surge in M&A activity, up 23% year-over-year in 2023 while it decreased in all other global markets. Many companies who feared being subject to more rigid regulations decided to go private and as such buyout premiums have soared to an all-time high. These premiums highlight the long-term mispricing in the equity markets and expose value propositions that weren't previously apparent. The Central Bank of Japan has kept its current monetary policy in place. This policy, i.e., negative interest rates (-0.1%), is the Bank's attempt to normalize Japan's economy and bring the country out of a long-term deflationary environment, a landscape in which consumers and companies were risk averse and afraid to consume and invest. We are hopeful that this policy will further transform the spending mindset of the Japanese. In fact, already domestic consumption is growing as pandemic savings are being redeployed into the economy and tourism is making a comeback after the lockdowns. See below a chart of past and forecasted consumer spending in Japan: Trading Economics DXJ's Strategy DXJ employs an indexing approach and is constructed to invest a minimum of 95% of AUM in securities that match those in the WisdomTree Japan Hedged Equity Index. The portfolio holds 447 equity names and is diversified among all industry sectors, though it is currently overweight in Industrial (24.22%) and Consumer Discretionary (19.22%) stocks. Below is a breakdown of DXJ by sector: WisdomTree No Single Stock Concentrations Driving Returns With AUM of about $3 Billion DXJ is a mid-cap ETF. Despite its current overweight in the Industrial and Consumer Discretionary sectors, I like the fact that the fund's top ten holdings only represent around 30% of total assets. This mitigates the occurrence of a select few stocks driving the ETF's returns. Currently no single company represents more than 5% of the entire fund. Below is a list of the top ten holdings in the portfolio. WisdomTree Toyota Motor Corp (TM), Sony Group (SONY), Japan Tobacco (OTCPK:JAPAF), and Mitsubishi (OTCPK:MSBHF), etc. represent a group of seasoned and well-established Japanese companies. As mentioned previously, Toyota has changed its tune in regards to corporate responsibility and is in the process of divesting its cross-shareholdings. We expect its conglomerate peers to follow suit if they haven't already. But investing in DXJ does pose some risks. For good reason, many people are uncomfortable investing in international equities. Any international investment presents its own unique risks, and this applies just as much to DXJ. On a global level, investors are concerned about China's economic recovery. A China slowdown affects the entire world economy, but particularly in Japan, who is its top trading partner. However, we believe Japan is nimble enough to find other markets for its goods and services in order to diversify away from China. And it has already started down that path by joining the U.S. and the Netherlands last year in restricting the sales of chip manufacturing equipment in China. There's also the risk that investors could encounter a liquidity problem where a negative political event befalls the Japanese government or markets and equity shares cannot be redeemed. However, this is an extreme scenario, particularly in Japan which has for a long time enjoyed a stable, relatively liberal, democratic leadership structure which encourages both domestic and foreign investment in its stock and bond markets. For exposure to the Asian equity market, Japan is your best bet over other sovereigns. Japan is the place to be and DXJ is the route to take. DXJ is the undeniable performance leader over the last five years in its category and its standard deviation of returns at 18 bps is just above the peer group average. Given the fund has outperformed its closest competitor by 22% in five years, I think this level of volatility is reasonable. Shares are very liquid. Average daily share volume of 1 million shares is much higher than the others. The closest to DXJ in liquidity is the Franklin FTSE Japan ETF (FLJP) at around 674 thousand shares. A real value proposition for me is that DXJ is currency hedged, a fact that becomes crucial if the yen depreciates against the dollar. Such depreciation will erode the returns of unhedged funds while DXJ owners are better protected on the downside. Another added bonus is that the fund pays a nice quarterly dividend and its cash payout has grown at a CAGR of around 17.5% over the last five years. I don't like to harp on expense ratios because I think other fund attributes are better indications of investment quality. That being said, DXJ's ratio at 48 bps is slightly higher than the average in its category and is worth it for what you're getting in performance, reliable income, risk management, and fund reputation. I really like DXJ and think it's the best choice in its space but its current price is giving me pause. This ETF has been on a slow but steady rise over the last three years and has just recently reached a new high. As such, it is currently trading at a 14% premium to its 200-Day MA. Much of this may be due to Toyota's similar recent run but I prefer to hold off right now on buying into anything too inflated. At this price, I'll follow the fund until it comes back to earth and lands in a suitable purchase range. I'm looking for it to trade between $85 and $90 before I'll consider buying. Data by YCharts  In any case, an allocation to Japan, regardless of size, is a prudent move and DXJ is the way to do it. For now though, I rate it a \"hold.\"","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2409797252"}