Investors seeking to cash in on the Japanese stock market face a Catch-22. The government is trying to goose the economy by, among other things, lowering the value of the yen, a move designed to make Japanese exporters more competitive (see Japan’s Rebound Is for Real). But a falling yen harms U.S. investors because money they have in Japanese securities translates back into fewer bucks. Enter WisdomTree Japan Hedged Equity (symbol DXJ), an exchange-traded fund that invests in the stocks of dividend-paying Japanese firms that have a market value of at least $100 million.
SPECIAL REPORT: Foreign Stocks and Emerging Markets
As its name suggests, the fund aims to give U.S. investors exposure to Japanese stocks while insulating them from fluctuations in the yen. That was clearly the way to go over the past year, as the unhedged Nikkei 225 soared 61%, despite a May selloff, while the yen declined 22% against the dollar. Because of its currency hedging, the WisdomTree ETF beat unhedged Japanese-stock ETFs by an average of 25 percentage points over the past year.
To qualify for the WisdomTree ETF, a firm must generate at least 20% of its sales outside of Japan. Americans will find most of the holdings unfamiliar, although the ETF does contain a few iconic giants, such as Canon and Honda. No stock can account for more than 5% of the ETF’s assets, and no sector can represent more than 25% of the portfolio, although holdings sometimes surpass those limits between annual rebalancings.
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