After a lengthy stretch of lagging its growth counterpart, the value factor is rebounding this year in the United States and receiving ample attention along the way. Some believe this could be the start of full-fledged rotation into value stocks and exchange-traded funds.

While the factor is resurgent in the United States this year, it has been winning for a while in Japan. Notably, that is the case from Japanese, large, mid and small caps.

The WisdomTree Japan SmallCap Div Fd (ETF) (NYSE: DFJ) is an exchange-traded fund that seizes upon two themes: value's leadership among Japanese stocks and rising shareholder rewards in Asia's second-largest economy. DFJ follows the dividend-weighted WisdomTree Japan SmallCap Dividend Index.

Digging Deep Into DFJ

“Companies in Japan tend to initiate dividends sooner over their life cycles than companies in the U.S., so it is not surprising that the WisdomTree Japan SmallCap Dividend Index did not exhibit that extreme of a sensitivity toward value. This would be one area that might explain the difference in performance between the WisdomTree Japan SmallCap Dividend and MSCI Japan Small Cap Value Indexes,” said WisdomTree in a recent note.

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On the surface, many investors might criticize the lack of inflation, weak macro data and Japan’s corporate exposure to emerging markets as good reasons why Japan’s equity market should have played catch up. However, investors are ignoring a really significant divorce between Japanese earnings revisions and a number of macro indicators.

However, in speaking to the value theme in Japan, by nearly any metric, Japanese stocks are trade at steep discounts compared to developed markets peers. For example, DFJ's underlying index has a price-to-earnings ratio of just over 12, while the Russell 2000 carries an earnings multiple of almost 19.1. DFJ's index is also the better yield play a with a dividend yield of almost 2.6 percent compared to the trailing 12-month yield of less than 1.5 percent on the Russell 2000.

“If we had to hypothesize the critical difference between the WisdomTree Japan SmallCap Dividend and MSCI Japan Small Cap Value Indexes, this would be it this: The MSCI Japan Small Cap Value Index is much more tilted toward companies that exhibited weak operating profitability over this period. Among Japanese small caps generally, robust operating profitability did exhibit outperformance over weak operating profitability during this period,” added WisdomTree.