Dividend growth, weak yen momentum case for this Japanese ETF


The US dollar recently hit a 20-year high against the Japanese yen, and that’s good news for Japanese exporters, but not all exchange-traded funds that track Japanese equities are good enough for this theme.

Suggesting that currency hedging can work, the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) is 2.49% higher year-to-date, while the unhedged MSCI Japan Index is 13% lower. That’s a jaw-dropping difference, and with the Federal Reserve raising interest rates and the Bank of Japan unlikely to follow suit, that gap could widen.

DXJ’s currency hedging alone is a definite advantage in this environment, but the benefits of the exchange-traded fund don’t stop there. In keeping with the tradition of many other WisdomTree ETFs – domestic and international – DXJ is packed full of dividend-paying stocks. This is an important trait when considering the history of Japanese dividend payers when bond yields rise.

“Historically, the Japanese high-yield basket has been the best inflation hedge in the world and has benefited from rising bond yields,” according to Jefferies.

DXJ’s constituents are companies with considerable export exposure and impressive dividend growth characteristics, making the fund an ideal spin on Japanese equities in this climate.

Jefferies “chosen high-growth stocks — with double-digit EPS CAGR and high yield — with a 12-month forward dividend yield above the regional median. EPS CAGR is the compound annual growth rate, or growth rate, of earnings per share. This indicates whether companies have been consistent in their earnings growth over the long term,” reports Weizhen Tan for CNBC.

Some of these stocks are members of the DXJ list, including Toyota Motor (NYSE:TM) – the ETF’s largest holding – Tokyo Electron, Honda Motor and Seven & I Holdings. These actions combine for approximately 12% of DXJ’s weight.

Other Japanese stocks highlighted by Jefferies that are also DXJ member companies are Fujitsu, Komatsu and Shionogi. The research firm also mentions some Japanese stocks with a strong track record of dividend growth.

Those names include Astellas Pharma, Fujitsu, Fuji Film Holdings, Sumitomo Mitsui Financial Group — DXJ’s sixth-largest holding company — and Murata Manufacturing. All of these names are part of DXJ’s 415 holdings.

The case for the ETF is bolstered by the fact that many Japanese companies have low dividend yields and large amounts of cash to support payout growth.

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Opinions and predictions expressed herein are solely those of Tom Lydon and may not materialize. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.


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