WisdomTree Japan Hedged Equity ETF (DXJ)
Chuck Jaffe: One fund on point for today, the experts have talked about it. This is the ETF of the Week Podcast. Welcome to the ETF of the Week Podcast, where we get the latest take from Tom Lydon, Vice Chairman at VettaFi, where they have a full suite of tools that are going to help you become a smarter, savvier, better investor in exchange traded funds. If you want to get more information or want to check it out for yourself, go to VettaFi.com.
Tom Lydon, Happy New Year. Great to chat with you again.
Tom Lydon: Happy New Year, Chuck.
Chuck Jaffe: Your ETF of the week is?
Tom Lydon: The WisdomTree Japan Hedged Equity Fund, Ticker symbol D-X-J.
Chuck Jaffe: DXJ, The WisdomTree Japan Hedged Equity Fund. Now, Tom, this is a fund that we’ve done on ETF of the Week, if I am not mistaken. This may be a fund that has been on ETF of the Week the most. Quite honestly, every time you have wanted to turn to the Far East, every time you wanted to say, ‘Hey you’re not invested fully enough in emerging markets,’ or ’You’re not making a play in Japan,’ this has been one that has been appealing, to say the least. I think, if I recall correctly.
So why this fund now?
Tom Lydon: So, a little bit of history here. You and I both remember what it was like back in the 1980s when Japan just exploded. Their equity markets exploded. Remember, the Japanese were buying up golf courses all over the U.S., and then things died off pretty quickly. And it never really came back to what it was back then. However, recently we’ve seen some nice moves in Japanese stocks.
They’ve got technology, they’ve got autos. And the great thing here, and when you look at the underlying holdings in this ETF, is the stocks are still inexpensive. The P/E ratio of this ETF is still in the single digits, which is crazy. So the point is, we’ve had a bit of a run here. It’s been a great year for this ETF in a few ways.
Not all the stocks in Japan are doing well; you’re still paying a price. That’s very reasonable. But the hedged equity portion of this ETF is really important. The Japanese yen has not done as well as the US dollar. What this ETF does is it hedges against the uptick in the US dollar, because that can have a negative effect on the currency exchange when you’re buying something overseas.
So, we’ve talked about this. There are a lot of different hedged equity portfolios that are out there. But we’ve had a pretty good dispersion between the U.S. dollar and the Japanese yen, at a time when equities in Japan have done very, very well. So if you were just to hold these unhedged, you wouldn’t have done as well as you would have in a hedged portfolio.
So this is something to consider because, look, currencies can be an asset class. They can make or break the performance in your portfolio. And as we are continuing to see more dollar strength as we go into this new year, we have an election year that will also be very, very important. And with Japanese stock prices still being inexpensive and the question of whether we’re going to continue to see weakness in the yen, this is an opportunity for us to bring forth.
Chuck Jaffe: The interesting thing to me on this fund, is there are a lot of people who, even though they’ll hear you say the messaging,you know, get fully invested internationally, make sure you’re covering things. Emerging markets right now are a tough sell. I mean, the BRIC nations, we’ve had to take Russia out of there because Russia’s not investable right now.
But China, for a lot of people, is also not investable. Now, Japan is never really considered an emerging market. It’s a developed market. But for folks who are looking internationally, but who maybe can’t take the opportunity in emerging markets right now, because they’re struggling, getting their head wrapped around China. Is this a place where, you know, you’re going to get that extra diversification, not necessarily subbing for emerging markets because they should be together in a portfolio, but at least if you can’t go all the way to emerging markets, do this?
Tom Lydon: Well, you bring up some great points. We do have a home-country bias here in the States. It’s crazy, not only with 55% of global market capitalization being outside the U.S., but how much investors within the U.S. have invested in U.S. stocks? And not only that but how much they invested in the S&P 500. And that’s worked pretty well in the last ten years.
But the pendulum may be swinging, Chuck. I mean, look at small caps. We’ve had a really good run in the last three months in small caps. And they’re still cheap compared to large caps. Here’s another area where there’s been a run in the market very positively. However, from a valuation standpoint, things are still less expensive. And if you’re a trend follower, boy, that’s what you want to do.
You want to be able to buy something that is above its trend line and, at the same time, you’re not paying through the nose for expensive stocks.
Chuck Jaffe: And it is above its 200-day moving average, which is important if you’re going to be a trend follower. But again, you know, most of the time you tell me it can be a trend following play. It can be a long-term allocation play, correct?
Tom Lydon: It can. And, you know, again, if you’re not in a situation where you can pay attention to your portfolio regularly, if you’re not implementing technical analysis within your portfolio, doing trend following, and just need to diversify. And when we talk about diversification, especially in developed countries, now there’s an opportunity where there’s a new trend in place and you’re not paying expensive prices for stocks.
This is something to consider. It’s a great example of what’s available out there today. While a lot of people are looking at their portfolios for 2024 and saying the S&P was doing okay earlier in the year, and now we’re seeing other areas of the world start to pick up, they’re asking where do I start moving some of that money that I’ve got on the sidelines?
As we know, a lot of people have some dry powder that they’re looking to put to work.
Chuck Jaffe: You dropped a word today in here when you were answering the question about if there’s a lot of choices and everything else. But in the old days, you were not only old enough to remember when Japan was dominating the financial world before it went on this long doldrums. But those days were before ETFs were really a popular thing.
You did have single country funds, and invariably with single country funds you had people like say, me, who were writing stories that were going, you know, ‘if you want to make a mistake, go too heavy into a single country fund.’ You can still find commentaries that say that as a dangerous spot. So it’s really important how much of an asset allocation are you letting something like this be. And does the fact that it’s hedged equity change, because you have that hedge in place? Which should maybe make things play a little bit differently? Are you willing to take a little more risk in terms of what this amounts to in a portfolio?
Tom Lydon: Look, single country funds can be risky, because they’re too concentrated. Not only are there not enough publicly traded companies in some of these country funds, but there are some dominant stocks from a capitalization standpoint. There are some single-country funds out there where the top ten stocks within that index might be 80% of the portfolio. That’s where things get a little risky, because you’re making some big bets on a few companies.
That doesn’t apply here. If you look at the weighting, it’s pretty well diversified among some established companies. That’s another thing to take into account. So how much are you putting in? Look, if you don’t have a big allocation in international, here’s an area to buy. A good part of the world, inexpensively, that’s above its trend line.
And look, Japan’s not going away. Japan’s economy will always have some opportunities and always have some challenges. But look, it’s an opportunity to buy Japan. That is a great country that puts out some great products through some excellent companies. And it’s not going to be highly correlated to what you’ve got in the U.S.
Closing Thoughts on the WisdomTree Japan Hedged Equity ETF
Chuck Jaffe: It’s DXJ, the WisdomTree Japan Hedged Equity ETF, the ETF of the Week from Tom Lydon. Tom, Happy New Year again. Great stuff. Looking forward to all we’re going to do this year.
Tom Lydon: Thanks, Chuck.
Chuck Jaffe: The ETF of the Week is a joint production between VettaFi and Money Life with Chuck Jaffe. And yes, I am Chuck Jaffe, and you can read all about my hour-long weekday podcast at moneylifeshow.com, or by searching wherever you find great podcasts like, you know, this one.
By the way, you can get a lot more information on everything you need to be a great investor of exchange traded funds at VettaFi.com. They have a full suite of tools for you there. They’re on Twitter, or X, @Vetta_Fi, and Tom Lydon, their vice chairman, and my guest, he’s on Twitter too.
He is @TomLydon. We’ll see you next week. Until then, happy investing, everybody.
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