Stocks in Japan have been hamstrung by the war in Iran and the subsequent closure of the Strait of Hormuz. In fact, recent flows data indicate foreign investors have been trimming exposure to Japanese equities.
Those may be interpreted as contrarian indicators potentially signaling opportunity for risk-tolerant investors with ETFs such as the WisdomTree Japan Small Cap Dividend Fund (DFJ ). DFJ hasn’t been immune to pullback in global equities at the hands of the Iran conflict. Still, over the past month, the ETF performed less poorly than comparable US-focused pure beta small-cap ETFs. On year-to-date basis, the WisdomTree Japan ETF is trouncing the Russell 2000 and S&P SmallCap 600 indexes.
That strength could be a sign that DFJ’s recent pullback, albeit one that’s relatively shallow, is a buying opportunity. Further supporting that notion is the point that some foreign investors, including U.S. hedge funds, are constructive on Japanese small-caps.
DFJ Holdings May Be Appealing to Wide Audience
DFJ turns 20 years old in June. It could catch tailwinds; foreign investors may embrace smaller Japanese stocks as the government there deploys shareholder-friendly reforms.
“As the Tokyo Stock Exchange is promoting measures to increase the profitability and shareholder value of listed companies, hedge funds holding Japanese assets are once again popular. Some hedge funds have turned to small-cap stocks that are lagging behind in improving capital efficiency and are undervalued,” reported Webull News.
For advisors and retail investors, DFJ offers another perk. It has efficient, broad access (it holds 800 stocks) to an asset class that can be tricky to tap into for foreign investors, particularly those wanting to embrace individual equities.
“Limited liquidity limits the amount of shares investors can hold, and smaller companies also provide less disclosure information in English. A survey by the Tokyo Stock Exchange also confirmed this,” noted Webull. “The data shows that as of December 2024, only 37% of companies with a market capitalization of less than 25 billion yen (about $169 million) will publish announcements in English, compared to 63% of companies with a market capitalization of 100 billion yen or more.”
Investors can mitigate those issues while accessing wide breadth by opting for DFJ as the way to play Japanese small-caps.
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