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On this episode of the “ETF of the Week” podcast, VettaFi’s Head of Research Todd Rosenbluth discussed the WisdomTree Japan Hedged Equity Fund (DXJ ) with Chuck Jaffe of Money Life. The pair talked about several topics regarding the fund to give investors a deeper understanding of the ETF overall.
Chuck Jaffe: One fund, on point for today… the expert to talk about it. This is the ETF of the Week.
Welcome to the ETF of the Week, where we examine new, newsworthy, unique, and intriguing exchange traded funds with Todd Rosenbluth, the head of research at VettaFi. And at VettaFi.com, you will find all the tools you need to be a savvier, smarter investor in exchange traded funds. Todd Rosenbluth, it’s great to chat with you again.
Todd Rosenbluth: Great to be with you again, Chuck.
Chuck Jaffe: Your ETF of the Week is…
Todd Rosenbluth: The WisdomTree Japan Hedged Equity Fund. DXJ.
Chuck Jaffe: DXJ. The WisdomTree Hedged Equity Fund. Now, today is the first time you and I have ever discussed this fund. But it’s not the first time this fund has been ETF of the Week. Tom Lydon, the former Vice Chairman at VettaFi, did ETF of the Week with me for over a decade. And this fund came up every now and again.
Tom was a trend follower. So invariably, if this fund was in was on his mind, it was because it had just popped above the 200-day moving average or something along those lines. Well, it’s been way above the 200-day moving average for a while. So why is this fund on your mind now?
Todd Rosenbluth: You’re right. It’s continued to perform quite well, and we can talk about how it’s constructed in a moment. But we think investors are underexposed to Japan. They’re primarily, as we’ve talked about in the past, U.S.-centric. The U.S. stock market has performed relatively well. We’ve seen Japan perform reasonably well, for a developed international market, but it’s been currency that has been weighing down the performance for the average investor.
So a hedged equity approach from WisdomTree, we think, makes a lot of sense, given how the dollar has been performing. And given that these are multinational dividend-paying stocks that are inside the fund.
Chuck Jaffe: One thing that nobody really talks about anymore, but they used to always discuss, was: you don’t really want to go fishing at the top of the food chain, because everything that’s at the top of the food chain winds up coming back to the pack. Well, this has been the number one Japan fund. Not just recently, but for a long time.
So is this a hot streak that can continue? This is superior management? You know, again you buy at the top of the heap, you always worry that it’s going to come back. This is the top-of-the-heap fund for the last five years.
Todd Rosenbluth: So, let’s talk about how this fund is constructed, and that probably will help answer the question. So this is an index-based strategy from WisdomTree. DXJ takes currency hedging to double level. So first, you’re hedged against the weaker yen and the strong dollar, which has been weighing down the performance of Japanese equities. And why most funds are performing more in the middle of the pack compared to this fund is outperforming because of its currency hedging.
And then doubling down, that second effect is the companies that are inside are exporting. They are benefiting from that currency tailwinds because they own these multinational companies. Nissan, Toyota Motor, and Nintendo, you’re finding a whole bunch of companies that you, as a U.S. investor are going to be familiar with because these are multinational brands and you’re benefiting from that.
We think that trend is your friend for this, to pull a technical term out there. But we think it’s also important how you would fit this into a broader portfolio. And I’m confident you were going to get there, so let me get there ahead of you. Most people have exposure to developed international markets in a more broadly diversified unhedged approach from iShares or Vanguard.
We think this can complement such a strategy. DXJ can sit on top of that and give you some of the currency hedge benefits, but without swinging for the fences necessarily all of the time, and being at the top or the bottom of the performance charts.
Chuck Jaffe: Well, I love it, Todd, when you do my job for me. So now I’m going to talk about how somebody else does your job for just a second. Because Morningstar rates this fund as the number one fund in its peer group, not just for this year, but for the last four full calendar years. And for five of the last ten full calendar years.
But the first of those five was ten years ago, and then you had five years of below average, mediocre at best performance, even among Japan funds. So, should people expect a little feast or famine, or you know, here you were talking about methodology? The methodology has been flawless for the last basically five years or four and a half years.
But before that, it was kind of flawed.
Todd Rosenbluth: So, while the methodology has been consistent, it’s just whether or not the yen versus the dollar is in your favor or it’s been against you. So if you’re hedging when you don’t need to hedge, then that’s a cost to your overall portfolio. Whereas, if you’re hedging when it’s been rewarding, then obviously it’s been helpful. So this is why we think DXJ can fit in complement with a more broadly diversified, developed international market ETF.
And that’s now how most people are getting their exposure. So ETFs from Vanguard from iShares are considerably larger than this fund, despite how strong this fund has been performing. We think folks who have exposure to one of those, more broadly diversified ETFs could benefit from the dividend-paying, multinational, currency-hedged approach that DXJ is offering. And we think — we’re finding more and more that advisors and investors are looking for international exposure.
China has been out of favor. We think Japan is more in favor. And of course, Japan and China work closely together. The companies are connected to one another in that the buyers in China are often Japanese-based companies. We think this is a good way of getting your international exposure, as a complement.
Chuck Jaffe: I heard something in there that makes me give one a very specific follow-up. Now, I mentioned Tom Lydon earlier, and Tom, of course, was a trend follower. So, frequently it was going to be, hey, is this a 200-day moving average play? And oftentimes whatever he was talking about was. If it would drop below the 200-day moving average, that would be the selling point.
You tend to be looking much more at portfolio construction and saying, I want something for the long term. And what I heard you say here was that this is that long-term choice for somebody who is looking for more Japan exposure, more international exposure, and hedged equity. But given what you said about the hedging, is this a case where if we wind up seeing monetary changes and we get to where the hedge is not going to be a boost, you’re out?
And at that point, while it’s ETF of the Week today, it would be ETF on the Outs, once the hedging is not necessary.
Todd Rosenbluth: So I don’t have the expertise. And I imagine the average investor who’s watching this doesn’t have the expertise to call whether or not the dollar versus the yen is going to stay in favor or be out of favor. We think having a strategic position in this ETF as a complement to where you’re unhedged makes a lot of sense. There are certainly going to be times when this fund is going to underperform, and you’ll want to revisit whether or not it makes sense.
We think now makes sense to be adding it to a portfolio. And we think holding it for the longer term.
Chuck Jaffe: And that’s why the DXJ, the WisdomTree Japan Hedged Equity ETF is the ETF of the Week from Todd Rosenbluth at VettaFi. Todd, really interesting stuff. I look forward to chatting with you again next week.
Todd Rosenbluth: I’ll see you next week, Chuck.
Chuck Jaffe: The ETF of the Week is a joint production of VettaFi and Money Life with Chuck Jaffe. Yes, I am Chuck Jaffe. Check out my hour-long weekday podcast on your favorite podcast app, or at MoneyLifeShow.com. To get better information and check out all your ETFs, go to VettaFi.com, where the full suite of tools is going to help you get better results and have a better portfolio. They’re on Twitter at @Vetta_Fi. Todd Rosenbluth, their Head of Research, and my guest. He’s on Twitter too. He is at @ToddRosenbluth.
The ETF of the Week is here for you every Thursday. Subscribe for follow on your favorite podcast app to not miss an episode. We’ll see you again next week. Until then, happy investing!
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