Small-Cap Japan ETFs: Big Things May Come in Small Packages

About one month ago, I explained why Japan might make my Christmas list. For one thing, major Japanese indexes were trading near book value not seen since 1982. For another, demographics favor the Japanese consumer in a decade-long consumption boom circa 2010-2019.

Yet in my feature, I addressed the perceived safer choice of the iShares MSCI Japan Index Fund (EWJ). These are the largest companies. And the fund is traded actively in the millions of shares.

Upon researching Japan some more, there are other reasons to consider EWJ. Its fall from grace is the smallest of any single-country exchange-traded fund in 2008. Ditto on the fall from high to low.

Certainly, I am not making light of EWJ's 37% YTD drop and 42% bear market collapse through Friday 11/21/08. But one does not have to look too far to see carnage that has been far more destructive.

Through Friday 11/21/08:

				YTD (Through 11/21)
iShares MSCI Sweden Index Fund (EWD)					-60%
iShares MSCI Brazil Index Fund (EWZ)					-64%
iShares MSCI South Korea Index Fund (EWY)					-65%
Market Vectors Russia (RSX)					-68%
iShares MSCI Austria Index Fund (EWO)					-70%

Now, though, there's another candidate in the Japanese ETF world. The Wisdom Tree Japan Small-Cap Dividend Fund (DFJ) and the SPDR Russell Small Cap Japan Fund (JSC).

With the Japanese economy firmly entrenched in a recession, with smaller companies typically having a more difficult time getting credit and with the surge of the Japanese yen hampering any chance for significant export growth, you'd have to question the sustainability of these funds. And yet, they may be the only 2 international funds that have recently climbed above a 50-day moving average.

In addition to a potential "buy signal" from technical price movement, there are other reasons to consider small-cap Japan funds. For one, more of the companies in these indexes are trading below book value than on the larger-cap counterparts. This presents a fundamental valuation reason to be a buyer.

One more item that I'd like to mention. The Wisdom Tree Japan Small-Cap Dividend Fund (DFJ) pays dividends annually. The WisdomTree web site suggests that the expected net yield for owners prior to December 22 will be 3%. That one-shot payout may be worth grabbing if you're in the process of tax-loss selling and rebalancing.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Comments

[ikkyu:]

Greetings,

Unfortunately, japanese equity markets and the $/Yen are rather strongly positively correlated, so investors in these u.s. funds are going to suffer from currency situations when things turn around in Japan.

By the way, J-reits are a great deal as well.

Cheers from Osaka,
john

2008 Nov 26 09:28 AM