Going Outside The United States For Rising Rates Protection

With a December rate hike by the Federal Reserve seemingly a sure thing, investors are rotating into asset classes that are positively correlated to higher U.S. interest rates. That rotation should not be limited to domestic fare.

Look Beyond The Boarder

The primary destination for investors looking to benefit from rising dollar, which has been sparked by soaring Treasury yields, is undoubtedly Japan. Price action confirms as much. It is not a coincidence that the U.S. Dollar Index is higher by 3.4 percent over the past month while the Guggenheim CurrencyShares Japanese FXY is lower by 9 percent.

Of course, yen woes are a boon for the WisdomTree Japan Hedged Equity Fund DXJ. Over the past month, DXJ is one of the best-performing non-leveraged developed markets exchange-traded funds, delivering a gain of just over 11 percent.

Small-Cap Counterpart To DXJ

DXJ's small-cap counterpart, the WisdomTree Trust DXJS, is higher by 8.5 percent over the past month, making it one of the best ex-U.S. small-cap funds over that stretch.

Among large-cap Japan ETFs, DXJ remains one of the most compelling options, because the fund tilts directly toward Japanese exporters that benefit from the weak yen. For example, DXJ allocates over 53 percent of its combined weight to consumer discretionary and industrial stocks.

“When the yen weakens, companies such as Toyota, Honda, Nissan, Panasonic, Sony, etc., become more competitive as their products see their relative prices drop in global markets, including the United States,” said WisdomTree in a note out Monday. “Sales volumes tend to increase along with an important positive impact from translating the foreign currencies acquired through foreign sales back into yen for reporting on their home country’s (in this case, Japan’s) financial statements. During the start of 2016, because of the yen’s strength, there was a rather large headwind blowing in the face of these companies. That headwind appears to have been, for the moment, removed.”

Running On Fumes? Not Necessarily

While Japan ETFs such as DXJ have recently been soaring, that does not mean the move higher for these funds is running on fumes. Currently, just over 10 Japan ETFs reside 10 percent or more away from their 52-week highs and six of those funds are currency hedged products, including DXJ.