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Play the Japan Rally With These ETFs


Investors have bought into the notion that newly elected Prime Minister Shinzo Abe could actually prove successful in weakening the yen.

SPDR Russell/Nomura PRIME Japan ETF (NYSEARCA:JPP): Due to the fact that is has just $14.55 million in AUM and average daily volume of just 3,200 shares, the SPDR Russell/Nomura PRIME Japan ETF is likely to turn off lovers of superficial ETF metrics. Still, there is no getting around the fact that the fund is up 5.4% in the past month.

JPP employs what is known as a sampling strategy. That means the ETF is not home to every stock in its underlying index. In this case, JPP is home to 391 of its index's 1,000 components and its overall lineup is very similar to EWJ's.

Industrial and technology names combine for 34% of JPP's weight and Japanese auto giants Toyota (NYSE:TM), Mitsubishi, and Honda (NYSE:HMC) are JPP's top three holdings. Combine that with the fact that JPP does not offer a currency hedge and JPP is another fund could build on recent gains if Abe is successful in suppressing the yen's upside.

WisdomTree Japan Hedged Equity Fund (NYSEARCA:DXJ): Speaking of yen hedges, the WisdomTree Japan Hedged Equity Fund does offer a hedge on USD/JPY fluctuations, but that has not held the ETF as the yen has plunged in recent weeks. Quite the opposite is true as DXJ has surged 8.83% in the past month. Said another way, DXJ has outperformed the ProShares UltraShort Yen (NYSEARCA:YCS), a double-leveraged play on the yen against the dollar.

Earlier this month, DXJ's underlying index began employing a geographic filter designed to remove companies that derive the bulk of their revenue from Japan. Interestingly, DXJ was already on the move higher before that filter was introduced. Over the past 90 days, DXJ has jumped 14.5%.

To put that move into context, combing the returns offered by the major South Korea and Thailand ETFs over the same time horizon would still result in a number that lags DXJ's returns.

Bottom line: DXJ is attractive because Japanese firms that are heavily dependent on their home nation to drive top-line growth, particularly if they run capital-intensive businesses that used imported raw materials. A weaker yen is good Japan's exporters, not so much for the importers, and DXJ capitalizes on that theme.

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