The Rundown on Japan ETFs

We’re less than three full months into 2011, and the year is already chock-full of stunning world events. Yet if you depend on the media to tell you what is happening, you may miss some of the most important news.

Case in point: U.S. and European intervention in Libya pushed the Japanese disaster right out of the headlines! The nuclear plant explosions were dramatic, of course, but long-term damage from the earthquake and tsunami is potentially much more significant. Today I’ll tell you what it all means for Japan-related ETFs.

Japan Matters …

First, let’s get past the idea that Japan doesn’t really matter to the rest of the world. Yes, China recently moved ahead to become the world’s second-largest economy. Japan, however, is still third — and with a much smaller population and very few natural resources.

But in stock market terms, Japan is way ahead of China and second only to the U.S.

As a matter of fact, Japanese stocks currently comprise 8.8% percent of the MSCI All-Country World Index ETF (ACWI), and a whopping 21.9 percent of the international benchmark iShares MSCI EAFE Index ETF (EFA).

Of course I like China as well. My point is that Japan can’t simply be dismissed as irrelevant.

Japan is too big to be ignored.

Certainly the damage in Japan is significant and the loss of life heart-breaking. The nation also has plenty of other long-term problems. Yet we may look back and see that the sell-off in Japanese stocks was overdone.

Am I recommending you jump into Japan right now? No, I’m not. The effects are still being assessed. I think it’s better to wait and see how much infrastructure was destroyed.

That’s why this is an excellent time to review the many ways you can invest in Japan with ETFs. U.S. investors can pick from more than a dozen Japan equity ETFs and yen currency ETFs.

Here is the rundown:

The 7 “Long” Japan Equity ETFs

• iShares MSCI Japan (EWJ)
• SPDR Russell/Nomura PRIME Japan (JPP)
• iShares S&P/TOPIX 150 (ITF)
• WisdomTree Japan Small Cap Dividend (DFJ)
• SPDR Russell/Nomura Small Cap Japan (JSC)
• iShares MSCI Japan Small Cap (SCJ)
• WisdomTree Japan Hedged Equity (DXJ)

EWJ is by far the biggest and most actively-traded name on the list. EWJ, along with JPP and ITF, offer similar portfolios of the biggest Japan-based public companies.

The remaining four Japan ETFs are more specialized:

• As the name suggests, DFJ holds small cap stocks that pay dividends.
• JSC and SCJ focus on small caps as well, but use different weighting strategies.
• DXJ offers broad-based Japan exposure but with a twist: The impact of the U.S. dollar/Japanese yen exchange rate is hedged. This means DXJ reflects the movement in Japanese stock prices alone. Of course this can be good or bad, depending how the yen performs.

Regardless of any setbacks the disaster might bring, Japan’s companies will bounce back.

Inverse and Leveraged
Access to Japan

ProShares provides investors a way to leverage their Japanese stock bets on both the upside and the downside:

• ProShares Ultra MSCI Japan (EZJ)
• ProShares UltraShort MSCI Japan (EWV)

EZJ is essentially a version of EWJ on steroids. On any given day, EZJ is designed to give you twice the performance of EWJ. And if you think the Japanese market will continue to fall, then EWV could give you twice the inverse of EWJ.

These ETFs should be used with caution, as I’ve pointed out in a past Money and Markets column.

Trading the Yen with ETFs

My colleague, currency expert Bryan Rich, just wrote last week that ETFs offer a great way for individual investors to participate in the foreign exchange markets. And here are the yen-based products you might want to consider:

• CurrencyShares Japanese Yen (FXY)
• WisdomTree Dreyfus Japan Yen (JYF)
• iPath JPY/USD Exchange Rate ETN (JYN)
• ProShares Ultra Yen (YCL)
• ProShares UltraShort Yen (YCS)

The ProShares ETFs offer long (YCL) and short (YCS) yen exposure. And both are leveraged with the goal of providing twice the movement of the daily exchange rate changes.

Whatever their stock and currency markets do, I wish our Japanese friends well in their recovery and rebuilding efforts. I know they will bounce back.

Best wishes,

Ron

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