New Japan ETFs Emphasize Favored Investment Factor

Devotees of investment factors, including low volatility, momentum and quality, know that application of those factors is not confined to domestic equities or U.S.-focused exchange-traded funds.

In fact, an increasing number of newly minted international ETFs adhere to the virtues of the quality factor.

Several of these new quality-focused ETFs are Japan-specific funds that track the JPX-Nikkei 400 Index, a benchmark that gives investors a fundamental approach to Japanese stocks.

Deutsche's JPNH

“The JPX-Nikkei 400 Index employs a rigorous screening process based on return on equity, cumulative operating profit and market capitalization to select high-quality, capital-efficient Japanese companies,” according to Deutsche Asset & Wealth Management (Deutsche AWM), the issuer behind the Deutsche X-trackers Japan JPX-Nikkei 400 Hedged Equity JPNH. That ETF debuted in August.

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As its name implies, JPNH features the utility of currency hedging, one of this year's most popular ETF themes. Prior to JPNH coming to market, Deutsche AWM introduced an unhedged equivalent, the Deutsche X-trackers Japan JPX-Nikkei 400 Equity ETF JPN. JPN debuted in late June as the original U.S.-listed ETF to track the JPX-Nikkei 400 Index and thus far has hauled in almost $9.5 million in assets.

Other Japan ETFs

All told, there are now four ETFs trading in New York that follow the JPX-Nikkei 400 Index, two of which are currency hedged products. The rivals to the aforementioned Deutsche AWM offerings are the Shares JPX-Nikkei 400 ETF JPXN and the iShares Currency Hedged JPX-Nikkei 400 ETF HJPX.

Differences “in fund construction between the currency-hedged iShares and Deutsche Bank ETFs can result in small performance differences over the short term, as shares of JPXN are trading during U.S. market hours and the constituents of the Nikkei 400 are not. But over the long term, the small differences in returns between the currency-hedged Deutsche Bank ETF and iShares ETF should be negligible,” said Morningstar in a recent research note.

The JPX-Nikkei 400 is a departure from the usual Japanese equity indices, in that it is “composed of companies with high appeal for investors, which meet requirements of global investment standards, such as efficient use of capital and investor-focused management perspectives. The new index will promote the appeal of Japanese corporations domestically and abroad, while encouraging continued improvement of corporate value, thereby aiming to revitalize the Japanese stock market,” according to the Japan Exchange Group.

Hedged HJPX

Industrial and financial services stocks combine for nearly 40 percent of HJPX weight, while consumer discretionary names command 18.5 percent – indicating HJPX is levered to the weak-yen-helping-Japanese-exporters story.

“A greater emphasis on returns and better corporate governance will be a slow, gradual process, especially in a place like Japan. While the Nikkei 400 Index will ostensibly identify the 'good' companies, by omission, it will also shame the 'bad' companies,” added Morningstar.