2023-10-09 17:54:00 ET
Summary
- DBJP is dominated by other Japan ETFs with lower expense ratios and the same allocations.
- The sector allocations of DBJP, particularly financials and consumer discretionary, are good exposures due to credit availability and the advantage of a devalued Yen.
- Despite recent spikes in fund flows into Japan, international allocators are still underweight Japan, and there are benefits to demographic declines in relation to strict labor market laws.
- Overall overweight Japan, but not with DBJP.
The Xtrackers MSCI Japan Hedged Equity ETF ( DBJP ) gives investors value-weighted exposure to Japanese large and mid-caps. We think the case for Japan is strong, especially now, but DBJP is dominated in terms of price performance by other Japan ETFs that accomplish the exact same allocations and currency hedging but at a dramatically lower expense ratio. There are no reasons to not choose the Franklin FTSE Japan Hedged ETF ( FLJH ) instead.
DBJP Breakdown
DBJP is pretty stock-standard in its allocations:
Large-cap and mid-cap exposure is achieved on a value-weighted basis. Ultimately, the performance is driven by the big index movers in Japan, and there is a heavy skew towards financials and consumer discretionary, in particular consumer durables and automotive. We don't have a problem with these sector allocations. We actually think they are good.
In the case of financials, the insecurity in the sector is less of a problem in Japan as credit remains highly available. This supports full-service banks' investment banking businesses as well. This is a positive thing.
In the case of consumer durables , discretionary and automotive exposures, the advantages owed to Japanese companies in particular is the advantage of a devalued Yen. Japan exports products produced with expenses in Yen, but sales are mainly to foreign markets which can cause dramatic improvements in profitability. It also contributes to more volume throughput at those higher margins. An excellent situation especially for automotive where there is still a buffer from below-average automotive volumes on the recovery from the semiconductor shortages.
Sectors (etf.dws.com)
Comments on Japan
In general, there are baseline technical benefits to Japanese allocations. International allocators are still underweight Japan, despite the recent relative spikes (still much lower than the last one in 2013) in fund flows into Japan and the associated performance of the indices like the TOPIX.
There is also top-down support to Japanese equities from government in the form of pretty aggressive marketing of the Japanese markets to foreign allocators by the highest offices in Japan, namely the Prime Minister. Also, the TSE is cracking down in various ways on caretaker management and corporate investment practices that lead to limited liquidity and other limits to value creation and shareholder payouts of currently over-capitalised businesses.
There are also some benefits to the demographic declines in domestic markets, which are smaller as a share of the revenue for large-cap Japanese companies than the cost side. Labour market laws are strict in Japan, leading to job security, sometimes unjustified, with companies protecting their hides by keeping real wage growth very stagnant. Inflationary pressures from increasing labour tightness due to Japanese demographic decline helps shave off some of the fat over time, like a slow, drawn-out and organic restructuring. Leaner companies means secular margin lift.
Bottom Line
There are two issues with DBJP. The first is an absolute one, which is that the currency hedging they do means you don't get the benefit of buying cheap Yen to buy Japanese stocks with, providing a lower effective entry point for foreign investors and a return opportunity just from the FX. With Yen appreciation likely to erode margin for big sector allocations when it eventually sees some recovery, not getting the FX lift is a negative.
More importantly, DBJP has a fatal issue of being dominated by strictly better ETFs with the exact same mandate: currency-hedged Japanese large and mic-cap exposures. The FLJH is an expense ratio of 0.09% to DBJP's 0.47%. On a fundamental basis, FLJH is strictly a better way to make this exact trade.
While we are overweight Japan, we would take FLJH over DBJP any day, but would probably still not take FLJH and instead take an unhedged fund.
For further details see:
DBJP: Dominated By FLJH And Other Currency-Hedged Alternatives