Deep Value In The Land Of The Rising Sun

In recent weeks, there has been increasing chatter about value stocks coming back into style in the U.S. For investors seeking deep value outside the U.S., Japan beckons.

Up 7.14% year to date, the WisdomTree Japan Hedged Equity Fund DXJ has been a decent though clearly not spectacular performer. The fund, which hedges yen movements against the dollar, has been hindered this year by increased global equity market volatility, which has boosted the safe-haven yen.

A stronger yen is a hurdle for DXJ, but the fund has shown some signs of momentum, gaining more than 4% over the past month. Plus, the WisdomTree offering has soundly beat the MSCI Japan Index and the MSCI EAFE Index over the past three years.

Why It's Important

Fortunately for yen bears and DXJ bulls, the Bank of Japan is open to more easy monetary policy.

“The Bank of Japan (BOJ) chose not to take any further policy action at its September meeting, but opened the door to more stimulus measures in October,” said WisdomTree in a recent note. “Many are worried about whether Japan can exit from its program involving equity ETF purchases, creating a cloud of uncertainty over the markets. We believe these ETFs will remain on the BOJ balance sheet for a long time and think those who worry might be missing a bigger picture.”

Another element to the Japan equity story, one that has been percolating over the past several years, is rising dividends and buybacks because Japanese companies are among the most cash rich in the world. DXJ's dividend yield of 1.87% is inline with the S&P 500 and implies ample room for payout growth.

“But companies are not just returning cash to shareholders via dividends. Buybacks have been on the rise, and Japan now has the highest buyback yield in the developed world outside the U.S.,” according to WisdomTree.

What's Next

Other data points confirm that DXJ is inexpensive relative to the MSCI EAFE Index, in which Japan is the largest geographic component.

“DXJ now is four P/E multiple points below the MSCI EAFE, whereas when it launched it 2006, it was offered at a premium,” according to WisdomTree.

Year to date, DXJ is beating the MSCI EAFE Value Index by a margin of better than 2-to-1, indicating Japanese stocks may be the better bet when it comes to ex-U.S. developed markets value exposure.

Related Links:

An Interesting Israel ETF

Headed For Heartache With Healthcare ETFs