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The fund generally will invest at least 90% of its assets in the component securities of the underlying index and in investments that have economic characteristics that are substantially identical to the component securities of the underlying index. The index is designed to measure equity market performance in those countries that MSCI Inc. (the index provider or MSCI) has classified as having developed economies, excluding Japan (DEEJ).

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Japan&#39;s Currency Conundrum (TOK, EWJ, FXY)

TOKYO OHKA KOGYO LTD by Tokyo Ohka Kogyo Co., Ltd.

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Here's an interesting ETF riddle: Is it possible for a fund issued by the world's largest ETF provider that is nearly five years old with almost $579 million in assets under management that features Apple (Nasdaq: <a class="ticker" href="/stock/aapl#Nasdaq">AAPL</a>) as its top holding to lead a relatively anonymous existence? In the case of the iShares MSCI Kokusai Index Fund (NYSE: <a class="ticker" href="/stock/tok#NYSE">TOK</a>), the answer is "Yes."

Admittedly, Apple's allocation in the 1,250-stock fund is just 2.43%, so TOK is by no means an Apple ETF, but with 1,250 holdings, the fund is long on diversity. 

One of the more recent feathers in TOK's cap is that it garnered an Overweight rating from S&amp;P Capital IQ earlier this year <a href="http://www.benzinga.com/analyst-ratings/analyst-color/12/04/2478940/japans-currency-conundrum-tok-ewj-fxy">as a play on a stronger Japanese yen</a>. 

The MSCI Kokusai Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets excluding Japan. The index tracks 23 countries, though 93.3% of TOK's country weight is tied up in 10 countries. The U.S. leads the charge with a weight of 58.1% while the U.K. chimes in at 10.5%.

Excluding Japan isn't a problem given that Japanese stocks continue to struggle despite calls that their valuations are compelling. The iShares MSCI Japan Index Fund (NYSE: <a class="ticker" href="/stock/ewj#NYSE">EWJ</a>) is down almost 2% year-to-date. TOK's biggest problem at the country level is exposure to a dozen Euro Zone members. A combined weight of more than 9% to commodities-rich Canada and Australia isn't helping TOK's cause in this market environment, either.

At the sector level, an 18.3% allocation to financials might give investors pause at the moment, but TOK's beta is only slightly higher than the S&amp;P 500's. Technology, consumer staples, energy, health care and consumer discretionary names also land double-digit weights with industrials not far behind at 9.93%. 

TOK's top-10 holdings include eight Dow components with Apple and Nestle (PK: NSRGY), the world's largest food company, the outliers. 

The expense ratio of 0.25% is a point in TOK's favor, but volume is light at less than 9,200 shares per day and Finviz data indicate the fund is neither optionable nor shortable. As for yield, TOK's 2.5% dividend yield is about 50 basis points better than what the S&amp;P 500 offers and only slightly higher than what an investor would get from the SPDR Dow Jones Industrial Average (NYSE: <a class="ticker" href="/stock/dia#NYSE">DIA</a>).

Regarding valuation, TOK's price/earnings ratio checks in at almost 18 and the fund trades at 3.5 times book value. It should be noted that TOK's P/E calculation excludes companies with negative earnings and iShares sets the P/E ratio of any company with a P/E over 60 to 60. The book value excludes negative book values and any company over 25 times book value is set to 25.

For now, TOK warrants a wait-and-see approach. The ETF's technicals are damaged. TOK failed to break through resistance at $43 in March and has since made a lower high around $42. If the 200-day moving average doesn't act as support, TOK could see the $35-$36 area. TOK hasn't traded below $35 since the third quarter of 2011, so if that area gives out, wait for TOK to show legitimate signs of bouncing back rather than trying to catch a falling knife. 

For more on TOK, please click <a href="http://www.benzinga.com/analyst-ratings/analyst-color/12/04/2478940/japans-currency-conundrum-tok-ewj-fxy">HERE</a>.

It's as simple and as relevant as the day is long: Japan, the world's third-largest economy behind the U.S. and China, is an export-driven economy and that economy is extremely sensitive to currency fluctuations. Or maybe it's more constructive to just say a strong yen is bad news for Japanese exporters.

This scenario prompts the Bank of Japan to engage in currency intervention campaigns with mixed results. In 2012, the results have been strong as the CurrencyShares Japanese Yen Trust (NYSE: <a class="ticker" href="/stock/fxy#NYSE">FXY</a>) is off almost 7% year-to-date.

"In the wake of last year's devastating earthquake and tsunami, the Bank of Japan (BOJ) has aggressively expanded Japan's monetary base to $1.37 trillion in an effort to stabilize the economy, pressuring the yen, by our analysis," S&amp;P Capital IQ said in a recent research note. 

S&amp;P Capital IQ goes on to note a weakened yen has bolstered EPS expectations for major Japanese exporters, good news considering export-heavy sectors such as industrials, consumer discretionary and technology account for almost 54% of Japanese equity market cap.

Unfortunately, there is another side to the weakened yen and it is that it diminishes returns for U.S. investors in Japanese equities and ETFs and S&amp;P notes the "catch 22 dynamic."

"Unfortunately, negative currency translation has negated any year-to-date alpha for U.S. investors. When Americans buy foreign stocks, their returns suffer when overseas currencies fall versus the U.S. dollar. Hence, the greenback's 6.7% year-to-date gain versus the yen has substantially eroded U.S. investors' dollar-denominated Japanese equity returns. While the MSCI Japan Index is up an impressive 17.6% in local currency terms, its gain dwindles to only 10% when measured in dollars, trailing the broader MSCI EAFE's 10.4% year-to-date gain, as well as the S&amp;P 500's 12.4% advance," according to the research note.

The iShares MSCI Japan Index Fund (NYSE: <a class="ticker" href="/stock/ewj#NYSE">EWJ</a>) is the ETF that tracks the MSCI Japan Index. Home to almost $5.6 billion in assets under management, EWJ is up nearly 8% this year. Investors must also consider that yen weakness may not last for extended period.

"Unfortunately for U.S. investors, even if the yen's recent weakness abates, we believe they would simply be trading currency translation pressure for renewed export jitters as a stronger yen threatens overseas appetites for Japanese goods," S&amp;P said.

As a result, the firm prefers the iShares MSCI Kokusai Index Fund (NYSE: <a class="ticker" href="/stock/tok#NYSE">TOK</a>), which it has an Overweight rating on. That fund is up 10.3% year-to-date. TOK, an ex-Japan developed market ETF, devotes more than two-thirds of its weight to the U.S. and U.K. Canada, Switzerland, France, Australia and Germany are the next five country weights. 

Home to almost 1,250 stocks, TOK features nine U.S.-based companies among its top-10 holdings with the exception being Nestle (PK: NSRGY), the world's largest food company. For those still not compelled to give TOK a look, maybe this will do the trick: Apple (Nasdaq: <a class="ticker" href="/stock/aapl#Nasdaq">AAPL</a>) is the ETF's top holding, though the tech juggernaut represents just 2.59% of TOK's overall weight.

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