The U.S. dollar recently hit a 20-year high against the Japanese yen, and that’s good news for Japanese exporters, but not all exchange traded funds tracking Japanese stocks are adequately levered to that theme.
Suggesting that currency hedging can work, the WisdomTree Japan Hedged Equity Fund (DXJ ) is higher by 2.49% year-to-date, while the unhedged MSCI Japan Index is lower by 13%. That’s a jaw-dropping difference, and with the Federal Reserve raising interest rates and the Bank of Japan unlikely to follow suit, that gap could widen.
Alone, DXJ’s currency hedge is a clear plus in this environment, but the exchange traded fund’s benefits don’t end there. In keeping with the tradition of many other WisdomTree ETFs — both domestic and international — DXJ is full of dividend-paying stocks. That’s an important trait when considering the history of Japanese dividend payers when bond yields rise.
“Historically, Japan high-yield basket has been the best inflation-hedge globally and a beneficiary of rising bond yields,” according to Jefferies.
DXJ’s components are companies with considerable export exposure and impressive dividend growth traits, making the fund an ideal spin on Japanese stocks in this climate.
Jefferies “picked stocks which have high growth – with the EPS CAGR that’s more than 10%, and high yield – with 12-month forward dividend yield above the regional median. EPS CAGR is the the compound annual growth rate, or growth rate, in earnings per share. It’s an indication of whether companies have been consistent in growing their earnings over the long run,” reports Weizhen Tan for CNBC.
Some of those stocks are members of the DXJ roster, including Toyota Motor (NYSE:TM) — the ETF’s largest holding — Tokyo Electron, Honda Motor, and Seven & I Holdings. Those stocks combine for about 12% of DXJ’s weight.
Other Japanese stocks highlighted by Jefferies that are also DXJ member firms are Fujitsu, Komatsu, and Shionogi. The research firm also mentions some Japanese stocks with strong dividend growth track records.
Those names include Astellas Pharma, Fujitsu, Fuji Film Holdings, Sumitomo Mitsui Financial Group — DXJ’s sixth-largest holding — and Murata Manufacturing. All of those names are among DXJ’s 415 holdings.
The case for the ETF is bolstered by the fact that many Japanese companies have low dividend yields and large amounts of cash on hand with which to support payout growth.
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