The Three Safest Ways to Invest in Japan
Two weeks ago, I revealed that Japanese stocks are some of the cheapest stocks on the planet and, therefore, a compelling “Buy.”
No one categorically rejected my investment rationale. It’s hard to argue against buying assets on the super cheap. However, many were miffed that I didn’t provide specific recommendations to invest in Japan.
So, let me take care of that complaint today.
To put these specific recommendations into context, though, I first need to address a key risk when it comes to investing in Japan.
Currency Fluctuation: The One True Risk
As we know, no investment is a sure thing. In this case, the yen is the one thing that can undermine an investment in Japanese stocks right now.
And the yen’s been remarkably strong, rising almost 35% over the last five years versus the U.S. dollar. But given Japan’s colossal debt-to-GDP ratio, continued deficit spending and aging population, a pullback is inevitable at some point.
Ironically, large cap Japanese companies would welcome a declining currency. It makes their products more attractive for export. So, it would lead to increased sales. For U.S. investors, though, a falling currency is a negative.
You see, most Japan funds – or Japanese stocks trading on U.S. exchanges – are denominated in dollars.
So when you buy the fund, the manager exchanges your dollars into yen to purchase stocks in Japan. And when you decide to sell the fund, the manager sells those stocks and exchanges the proceeds from yen back into dollars.
The catch? If the value of the yen falls during that period, the fund gets back fewer U.S. dollars – and, in turn, so do you. In other words, even if Japanese stock prices increase, you could still end up losing money.
Of course, currencies can work in our favor as investors. But that’s not likely in Japan given the historic strength of the yen in recent years.
Long story short, if we buy Japanese stocks and don’t hedge our currency exposure, we’re asking for trouble. Any equity gains could be offset or even nullified if the yen depreciates significantly.
With that in mind, here are three ways to overcome this serious risk and profit from the inevitable rise in Japanese stock prices:
~Safe Japan Bet #1: WisdomTree Japan Hedged Equity Fund (NYSE: DXJ)
This ETF actually provides two investments in one…
First, it provides exposure to some of the largest dividend paying Japanese stocks. We’re talking about companies like Nippon Telegraph, Mitsubishi UFJ Financial, Canon and Honda Motor Corp.
Since most of the companies in the fund are exporters, they boast a rare negative correlation to the yen. So as the yen falls, the stock prices for these companies historically rise.
It’s worth noting that six of the fund’s top 10 holdings are also top 10 holdings in the more popular iShares MSCI Japan Index Fund (NYSE: EWJ). The WisdomTree fund, however, sets itself apart by also providing a hedge against fluctuations between the value of the U.S. dollar and the yen. So when Japanese stocks rise, so does the price of the ETF, regardless of what happens to the yen.
In essence, the ETF allows us to enter a pairs trade with a single investment. And we can do so cheaply, too, as the fund’s expense ratio of 0.48% is the lowest among all Japan ETFs.
As an added bonus, the ETF pays a modest dividend of about 2.4%. So we’ll get paid to wait if Japanese stocks trade sideways for a little while.
~Safe Japan Bet #2: WisdomTree Japan SmallCap Dividend Fund (NYSE: DFJ)
As I told you two weeks ago, Japanese small caps represent the best bargains and historically outperform large-cap stocks. And the beauty about small caps is that they come with a built-in currency hedge.
How so? Well, since small-cap companies primarily serve the domestic market, they don’t rely heavily on exports. So a strong yen doesn’t significantly hamper their profitability, which is precisely what makes this fund so attractive (and safe).
It provides exposure to more than 350 small-cap dividend payers in Japan. Many of them are directly connected to the local economy, which effectively neutralizes our currency exposure.
As the name suggests, it also pays a modest dividend of 2.2%. So, again, we’ll get paid to wait.
~Safe Japan Bet #3: Super Cheap, Small Cap Japanese Closed-End Fund
Why settle for buying Japanese small-cap stocks on the cheap, when we can buy them cheaper still? Well, we can do just that with this closed-end fund that I recently recommend to WSD Insider subscribers.
As you know, closed-end funds can trade at a premium or discount to Net Asset Value (NAV). And right now, this fund is trading at a mouthwatering 14.2% discount to NAV.
In other words, it’s trading below its liquidation value at about $0.86 on the dollar.
Mind you, it’s not uncommon for this fund to trade at a discount. But not this wide. The fund’s five-year average discount checks in at just -6.7%.
As I’ve written before, “Huge disparities between market price and NAV don’t last forever. Savvy investors recognize the bargains and eventually swoop in to capitalize on them.”
I recommend you be one of those investors. All you have to do to find out the identity of the fund is sign up for a risk-free trial to WSD Insider here. So what are you waiting for?
Ahead of the tape,