WisdomTree Japan Hedged Equity ETF (DXJ)

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Chuck Jaffe: One fund on point for today and the expert to talk about it, welcome to the ETF of the Week.

Yes, it’s the ETF of the Week where we look at new and interesting, unique, different trending and intriguing exchange-traded funds, and we do it with Tom Lydon. He’s the vice chairman at VettaFi, where they have a great suite of tools that’s going to help you become a smarter and savvier investor in exchange-traded funds. Tom, it’s great to chat with you again.

Tom Lydon: Great to be back. Thanks, Chuck.

Chuck Jaffe: Your ETF of the Week is…

Tom Lydon: The WisdomTree Japan Hedged Equity ETF, ticker symbol DXJ.

Talking Up DXJ

Chuck Jaffe: DXJ. The WisdomTree Japan Hedged Equity ETF. It’s a fund that we have talked about in the past on ETF of the Week. Why is it back as ETF of the Week now?

Tom Lydon: You’re right, Chuck. We’ve talked about this ETF before, but specifically how this is structured is very advantageous to the markets and to the economies today.

So a couple things and that most investors may not know is that while we’ve been hiking interest rates here in the US in hopes of fighting off inflation. Over in Japan, believe it or not, the Bank of Japan’s short-term interest rates are actually at negative 0.1%.

They haven’t done anything. All they’re trying to do is infuse money into the system with the hope that it will spark the economy and what little inflation they have over there. Obviously, they’re not concerned about.

Where over here in the US, not only have we been fighting inflation. However, the Fed recently announced that they’re not doing as well as they hoped. They may have more rate hikes in them, and the recession that we were anticipating we’d see by the end of this year, we may not see until next year. And ultimately, we might not see a decline in rates for another year or so. So what does that mean? How does that translate?

Well, a couple things. Rising interest rates does great things for the US dollar. We’ve seen the US dollar continue to advance against major currencies, including the Japanese yen. So the US dollar is up 15% year to date compared to the yen, which has been very, very favorable.

At the same time, the Japanese stock market has advanced 35%. But part of that, if you didn’t hedge, you weren’t able to capture that. So now getting to all the great benefits that we have here in this WisdomTree Japan Hedged Equity ETF, what it does is it takes out the negative aspect of the yen declining when the actual stock market is advancing?

So by bringing that back and hedging against it, it’s actually shown to have even that much more appreciation. And Chuck, I know as I threw this ETF out at you, you’re already doing your homework and looking at Morningstar and seeing how that’s advanced. But the fact is, if you just bought the market itself and left it unhedged to the local currency, you wouldn’t have done as well as you would’ve by buying this ETF that was hedged. So, it actually invested or correlated with US dollars versus the Japanese yen. Does that make sense?

Chuck Jaffe: It does. I also should point out this is a fund that’s got interesting trend lines. Now, it basically crossed its 200-day moving average at the start of the year. It’s been above the 200-day moving average ever since. But it recently was kind of flirting with the 50-day average in terms of falling below it. It’s now back above both.

Do you like the fact that you’ve got two trend lines working in your favor here and that one’s been in place for a lot longer but the other one is kind of back confirming that again now?

Tom Lydon: Well, it’s nice to have a positive trend line in place. However, the other thing from a fundamental standpoint is if you look at the P/E ratio, it’s under 10. So even though we’ve seen advancements in the Japanese stock market, the valuations are very, very reasonable. You’re not paying up.

When we have a valuation in the S&P 500 that’s over 20, these major companies in Japan, from a valuation standpoint, are 50% off. Companies like Toyota, Mitsubishi, Sumitomo, Japan Tobacco, Tokio Marine, these are all well-established companies that are going to continue to do well. They’re all export companies that with the decline in that local currency are actually going to be able to be more profitable when they ship those products overseas.

So there’s a lot I’ve wrapped up in here. I think what I’m trying to bring to the surface is if we continue to have higher rates here in the US versus Japan, we may continue to see the dollar be stronger than the Japanese yen. At the same time, stocks in Japan aren’t expensive. They’re still relatively cheap with industry groups that are very, very diversified. And while the economy is still strong, a global economy is still strong, these products still are in demand.

Chuck Jaffe: Now, one of the things that has been a recurring theme for you this year, when you’re going international or you’re going emerging markets, has been that domestic investors not fully diversified internationally. That’s where you get the money from.

But let’s do this a little bit differently. Because if folks have been listening to the ETF of the Week and following it, well, you’ve built yourself a portfolio with international holdings over the course of this year and last because that message has been repeated.

So how much do you let this be of a portfolio? Do you want to play hedged versus unhedged? And is there room for both? In other words, do they want to make that currency play at all? Or, this is make this one and then keep the rest of your international holdings wherever we’ve talked about it in the past?

Tom Lydon: It’s a great question, Chuck. And look, every week we bring up one ETF for you to consider, and everybody that’s listening is different. Some people just have buy and hold standard asset allocation strategies that work well over time. That works well for them because they don’t have the time or the interest or the knowledge to be able to make short-term trend following decisions.

There are others that embrace trend following and are looking at their portfolio regularly, have the time and the discipline to follow these types of trades or trends. So that works well.

I would say one thing that comes out, based on your question. We may be in a situation where the US dollar continues to be strong versus other currencies. And if that’s the case, whether we’re talking about Japan or other international markets, there are some other ETFs out there that are more global in nature that also hedge their local currencies.

So take a look, WisdomTree has them, DWS has them. There are other ETFs out there that if you’re concerned about your international allocation in the fact that the local currencies may continue to be weak over time. This might be something that you consider too.

So look, we’re throwing a lot at people right now. I think it definitely is a trend-following opportunity because it’s specific to Japan. But if you do have cash on the sidelines and you’ve got a little bit of FOMO and you’re feeling like you might’ve missed out on something, here’s an opportunity to get into an area of the market that’s not overly expensive, number one. Number two, even though it may have a declining value in its local currency, you can hedge against that. And most importantly, if it does go below its trend line, you can always sell it.

Chuck Jaffe: There you go. And again, even though we talk about trend lines as if they’re going to make you move out rapidly, this one’s been above the 200-day moving average all year. So they haven’t had to make many moves. The question now is do you want to make a move into the DXJ? Again, that’s the WisdomTree Japan Hedged Equity ETF, the ETF of the Week from Tom Lydon? Tom, great stuff as always. See you next week.

Tom Lydon: Thanks, Chuck.

Chuck Jaffe: The ETF of the Week is a joint production between VettaFi and Money Life with Chuck Jaffe. And yeah, that’s me. And you can learn all about my hour-long weekday show by going to moneylifeshow.com or by searching for it on your favorite podcast app.

To learn more about investing in exchange-traded funds, there’s no better place than VettaFi. It’s vettafi.com, on Twitter @Vetta_Fi. And Tom Lydon, their vice chairman and my guest, well, he’s on Twitter too, he is @TomLydon.

The ETF of the Week is here for you every Thursday. We’d love it if you make sure you don’t miss a thing by subscribing wherever you get your favorite podcast. And if you’ve got time, leave us a review, as they really do help us. Until next week, and on behalf of Tom Lydon, I’m Chuck Jaffe saying happy investing, everybody. We’ll see you again soon.

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