Tag Archives: alternative

Buy: The WisdomTree Japan Hedged Equity ETF

Summary An ETF that invests in dividend paying companies incorporated in Japan and listed on the Tokyo Stock Exchange. The end of 20 years of deflation in Japan makes Japanese equities profitable in the current economic state. Abe’s pledge to further lower the corporate tax will stimulate Japanese stock market. Overview of the WisdomTree Japan Hedged Equity ETF (NYSEARCA: DXJ ) The WisdomTree Japan Hedged Equity ETF is an exchange-traded fund incorporated in the USA. It is designed to “to provide exposure to the securities in Japan, while at the same time hedging exposure to fluctuations between the value of the U.S. dollar and the Japanese yen” (WisdomTree.com). The Index is designed to have higher returns than a similar non-currency hedged investment when the yen depreciates relative to the U.S. dollar. Conversely, the index is designed to have lower returns if the yen strengthens against the U.S. dollar. The Fund invests in dividend paying Japan-incorporated companies that derive less than 80% of their revenue from sources in Japan. By excluding companies that derive 80% or more of their revenue from Japan, the index focuses more on companies with significant global revenue base (SEC). (click to enlarge) (Source: Bloomberg) (click to enlarge) (Source: Wisdomtree) The end of 20 years of Deflation Source: inflation.edu After a 20 year boom led by real estate and stocks during the 1970s and the 1980s, Japan experienced huge deflation for the next 20 years. Japan never recovered to the 2% annual inflation which is the hallmark of a proper financial system. However, as Shinzo Abe was elected Prime Minister of Japan, he initiated the “Three Arrows” policy. The policy entailed: (1) printing money to raise prices (2) buying $75B in bonds each month until March 2015 (3) targeting a 2% annual inflation rate (4) weakening the yen (5) increasing spending to create jobs and (6) delay inevitable tax increases. Why Japanese Equities Investing in Japan can be extremely profitable in the current economic state. In September 2015, the Nikkei 225 stock index experienced its biggest one day jump since 2008 because Prime Minister Abe pledged to further lower the corporate tax rate ( Bloomberg ). Compared to the ROE for Tokyo Stock Price Index in 2009, which was -4%, the ROE for TOPIX is now 8.6%. Hence investors should consider purchasing Japanese equities. This significant increase in ROE is indication of Japan’s economic growth potential. Moreover, Japan is still in the monetary easing mode. This quantitative easing program weakened the yen successfully, making the exportation of Japanese goods easier. (click to enlarge) JPYUSD Spot Exchange Rate (Source: Bloomberg) Abe latest pledge to further lower the corporate tax definitely supports Japanese equities. It increased, however, the debt of the country. Indeed, S&P recently downgraded Japan’s sovereign credit rating (marketrealist). Fortunately for Japan, the QE program is likely support stocks in the foreseeable future. Why DXJ DXJ is a perfect ETF that provides exposure to the Japanese equity market while hedging out the currency fluctuations so that the fund can focus purely on the performance of Japanese stocks. It is the best ETF for investors who believe that the yen will continue to weaken against the dollar but are also still seeking to scoop up Japanese equities. If the investor thinks that the yen will strengthen against the dollar, the fund will underperform other broad based Japanese ETF such as the iShares MSCI Japan ETF (NYSEARCA: EWJ ). (Source: etfdb.com as of 10/9/2015) As the yen weakened during the monetary easing mode and Abe recently lowered corporate taxes, it is apparent that DXJ will start to provide better returns than EWJ. Japan’s QE program will make the Japanese companies to export more goods. Since DXJ is composed of companies whose main revenue source is not Japan, DXJ will benefit from Abe’s policy. Symbol 1 Week 4 Week YTD 1 Year 3 Year 5 Year ProShares UltraShort MSCI Japan ETF (NYSEARCA: EWV ) -7.48% -6.89% -22.21% -26.23% -63.18% -68.52% DXJ 5.13% 3.31% 6.78% 8.19% 75.26% 58.00% EWJ 3.86% 3.07% 8.17% 9.40% 38.10% 27.77% SPDR Russell/Nomura PRIME Japan ETF ( JPP) 3.88% 3.53% 8.68% 10.40% 39.03% 31.10% iShares Japan Large-Cap ETF ( ITF) -2.40% -7.74% 6.10% 1.54% 36.45% 25.62% ProShares Ultra MSCI Japan ETF ( EZJ) 7.56% 7.16% 12.27% 13.61% 65.63% 27.51% Deutsche X-trackers MSCI Japan Hedged Equity ETF ( DBJP) 3.98% 2.79% 7.77% 20.34% 104.74% n/a Precidian MAXIS Nikkei 225 Index ETF ( NKY) 2.54% 1.96% 6.95% 8.76% 39.96% n/a (Source etfdb.com) The above graph is the historical data for Japan Equities ETF. DXJ has the second highest one week return and also the highest five year return, showing strength among other Japan ETFs. Symbol Inception ER Commission Free First Trust Japan AlphaDEX ETF ( FJP) 2011-04-19 0.80% Not Available WisdomTree Japan SmallCap Dividend ETF ( DFJ) 2006-06-16 0.58% E*TRADE WisdomTree Japan Hedged SmallCap Equity ETF ( DXJS) 2013-07-01 0.58% E*TRADE ITF 2001-10-23 0.50% Not Available NKY 2011-07-13 0.50% Not Available DXJ 2006-06-16 0.48% E*TRADE WisdomTree Japan Hedged Capital Goods ETF ( DXJC) 2014-04-08 0.48% Not Available WisdomTree Japan Hedged Financials ETF ( DXJF) 2014-04-08 0.48% E*TRADE WisdomTree Japan Hedged Health Care ETF ( DXJH) 2014-04-08 0.48% Not Available WisdomTree Japan Hedged Real Estate ETF (D XJR) 2014-04-08 0.48% E*TRADE WisdomTree Japan Hedged Tech, Media & Telecom ETF ( DXJT) 2014-04-08 0.48% Not Available EWJ 1996-03-12 0.48% 2 Platforms iShares Currency Hedged MSCI Japan ETF ( HEWJ) 2014-01-31 0.48% Not Available iShares MSCI Japan Small-Cap ETF ( SCJ) 2007-12-20 0.48% Not Available DBJP 2011-06-09 0.45% E*TRADE IQ 50 Percent Hedged FTSE Japan ETF ( HFXJ) 2015-07-22 0.45% Not Available WisdomTree Japan Dividend Growth Fund ( JDG) 2015-05-28 0.43% Not Available Deustche X-trackers Japan JPX-Nikkei 400 Equity ETF ( JPN) 2015-06-24 0.40% Not Available (Source etfdb.com) DXJ has an expense ratio of 0.48%, meaning that the fund will cost $4.8 in annual fees for every $1000 of investment, the average ETF however, carries an expense ratio of 0.44% (Morningstar Investment Research). DXJ costs more than the comparable Japanese ETF products and average ETFs. However, ETF implements strategy explained above is more efficient and cheaper than any other products. It is the perfect ETF for investors who are wary of currency changes but are bullish on Japanese stocks. Lastly, the Tokyo 2020 Olympic boost will definitely help Japan recover from the last two decades of economic torpor.

Is The Recovery Of GLD Underway?

Summary Shares of GLD have bounced back in the past couple of weeks. The recent depreciation of the U.S. dollar has helped pull up the price of GLD. Will the recent rally of GLD continue? Shares of the SPDR Gold Trust ETF (NYSEARCA: GLD ) have rallied in the past couple of weeks, following the disappointing non-farm payroll market and a weaker U.S. dollar. The gold market isn’t out of the woods just yet – even though some analysts already suggest the recovery of gold is underway – as the Fed is still on course to raise rates in the coming months, and the U.S. dollar may start to climb back up if future U.S. economic reports such as JOLTS and consumer sentiment show better-than-expected results. But for now, the gold market benefits from the current market conditions. The U.S. dollar isn’t picking up, for now The appreciation of the U.S. dollar during the first few months of 2015 came to halt. Although the gold market saw short-term gains during the first half of the year, it dropped between April and July. Since then, however, gold has remained relatively flat, as the U.S. dollar also remained relatively (compared to the beginning of the year) stable. (click to enlarge) (Source: FRED ) The hesitation of the FOMC in raising rates, and the lower-than-expected growth in non-farm payroll report helped pull up the price of GLD. The minutes of the last FOMC meeting also didn’t offer much input as to when the Fed plans to raise rates, or any new insight behind the Fed’s deliberations. But the main issue will remain the progress of the U.S. economy, including when it comes to inflation and labor. As for labor, the JOLTS report will be released this week, and may boost the U.S. dollar if it shows better-than-expected results. It may offset the adverse impact the NFP report had on the U.S. dollar. Nonetheless, the market isn’t convinced that the Fed is ready to raise rates. As of the end of the week, the implied probabilities of an October rate hike are below 10%, while in December, the odds are still nearly unchanged at 37%. And these odds suggest the market isn’t convinced that the Fed will raise rates. And in a recent interview, Federal Reserve Vice Chairman Stanley Fischer opened the door for a scenario in which the Fed may opt out from raising rates this year, as opposed to repeated claims that the Fed, including Chair Yellen , aims to raise rates this year. He stated that a rate hike is expected, but isn’t a commitment. As long as the Fed isn’t raising rates, the U.S. dollar may remain flat or even decline against other currencies, which will keep fueling the rally of GLD. But GLD isn’t the only way people invest in the yellow metal – some also consider buying coins. And the demand for coins seems to have gone up in previous months. Higher demand for coins? The U.S. mint experienced a rise in gold coin sales back in July-September. Since then, however, sales have gone down and are at among the lowest levels for this year, as presented in the following chart. (Data Source: U.S. Mint ) This is only a signal as to the changes in the physical demand for gold for investment purposes in the U.S. So far, the slow fall in gold prices in the past few months may have fueled a rise in demand for gold during the summer. I have pointed out in a previous article that total demand for gold declined in the second quarter. So even though this recent finding may signal (albeit it should be taken with a grain of salt, considering it’s not a complete account of the changes in the demand for gold coins on a global level – less than 10%) a modest gain in demand for coins during the third quarter, it’s still too early to determine if this means the gold market is tightening, and how this could affect the price of gold in general and GLD in particular. Final note The recent rally in GLD may not last long, especially if the U.S. reports including JOLTS and consumer sentiment show promising results. If not, the recent rally of GLD is likely to continue until other central banks boost their QE programs (ECB or BOJ), which will drive up the U.S. dollar, or until the Fed starts to drop stronger hints as to timing of the historic rate hike, which seems less likely to occur this year. As long as the Fed keeps pushing the rate hike to a later date, the price of GLD will keep seeing modest relief. For more please see: ” Gold and Inflation ”

Aberdeen Asia-Pacific Income: Emerging Markets Bonds At A 17% Discount

Summary Example of one Asian baby thrown out with the bathwater by retail investors. Relatively safe portfolio of bonds, overseen by a reputable manager, with a yield in the high single digits. High potential for alpha through eventual compression of high-teens discount to NAV. Background on Closed-End Funds For those who want exposure to a particular sector or asset class, closed-end funds sometimes represent a cheaper vehicle than alternatives like ETFs and traditional mutual funds. This is because ETFs and conventional mutual funds frequently redeem/issue new shares to ensure that the price per share remains in line with the net asset value of the underlying holdings in the funds. This is not the case for closed-end funds. Rather, the share price of closed-end funds is driven by the market forces of supply and demand, which sometimes creates attractive opportunities to buy stakes at big discounts to NAV. This tends to happen when sentiment for the particular sector on which a closed-end fund focuses becomes negative, causing some investors to sell irrespective of price. This is currently the case for several Asia-focused closed-end funds. I previously wrote about one such opportunity to obtain Chinese equity exposure at a 20%-plus discount. Here, I’ll cover another opportunity to buy debt exposure at a discount. Aberdeen Asia-Pacific Income Fund Overview The Aberdeen Asia-Pacific Income Fund (NYSEMKT: FAX ) was established in 1986 with an investment objective to seek current income through investment in Australian and Asian debt securities. Aberdeen is a reputable closed-end fund manager, which has conducted share buybacks through tender offers for several of their other funds (such as The India Fund, Inc, Aberdeen Chile Fund, Inc, and Aberdeen Greater China Fund, Inc) when they have traded at significant discounts to NAV. The fund currently pays a monthly dividend of 3.5 cents (equating to a ~9.3% yield), and its expense ratio is moderate at 1.09%, excluding interest expense and based on the fiscal year ending October 31, 2014. The fund makes moderate use of leverage, which stood at approximately 22% of gross assets at August 31, 2015. Leverage is of course a double edged sword and could magnify any gains or losses experienced by the underlying assets. As can be seen below, although the fund’s longer term returns have been reasonable, performance has suffered recently amidst general market turbulence in the sector. Source: Aberdeen Asia-Pacific Income Fund Performance Report This lackluster recent performance has spurred investor outflows that have caused FAX to now trade at a ~17% discount to NAV. As shown below, this has happened numerous times in the past when Asian market sentiment turned negative (e.g., 2008, 2000, 1998), but in all cases the discount eventually collapsed when sentiment stabilized. (click to enlarge) Source: CEFConnect Portfolio Composition Based on reported holdings at August 31, 2015, the FAX portfolio is composed of ~44% corporate bonds, ~53% sovereign and supranational bonds, and ~2.6% cash. The vast majority of the portfolio is made up of investment grade (BBB- or higher rated) bonds. To put this in a little perspective, the average annual historical default rate of bonds rated IG by S&P over the past few decades is well-under 0.5%. Source: Aberdeen Asia-Pacific Income Fund Fact Sheet The portfolio is diversified geographically as summarized below, though Australia, China, India and South Korea are the largest constituents. Source: Aberdeen Asia-Pacific Income Fund Fact Sheet Conclusion Due to the Aberdeen Asia-Pacific Income Fund’s current large discount to NAV, investors now have the ability to own a relatively safe portfolio of Asian bonds, overseen by a reputable manager, for ~83 cents on the dollar.