Japan ETF and CEF Performance in January

January was mostly unexciting for Japan ETFs, despite new multi-year highs for the Nikkei 225, due to the weak yen which hurts US$ based investors. Still, every Japan fund posted a positive monthly return and one fund stands out with a 6.3% return.

It's no surprise that a smaller cap fund came out on top, but it is interesting in that it was not one of the offerings from Wisdom Tree: Japan SmallCap Dividend (DFJ) or StateStreet: Russell/Nomura SmallCap Japan (JSC). Note DFJ gained more than 25% in '06 following its mid-year launch, beating all Japan ETF/CEFs.

The winner is the Japan Smaller Cap Fund (JOF), a closed-end fund. Let me warn however, according to Closed-endfunds.com (Closed-end Fund Assoc.), it is trading at an 18.7% premium as of Friday's close. I'm not able to find its most recent holdings, so it's hard to see exactly what drove its performance.

Before investing here I'd make sure the premium is really worth it compared to DFJ and JSC and also confirm the dividend (12.1% yield per Yahoo! Finance), as well as consider its higher expenses (at least 2x higher than DFJ and JSC).

At this time, I like the smaller caps over larger caps when investing in Japan, both stocks and funds -- although, I am not thrilled about the trading volumes for DFJ and JSC. I'm not ready to commit new money to Japan now, especially in terms of "investing" via funds. I want to see how the forex situation plays out. I don't see the BoJ raising rates this month, but there is increasing external pressure from overseas regarding the yen, so who knows what will happen.

I continue to look at Japan as a stock pickers market. (Note: JOF is an example where stock picking beats index investing, at least for last month.) If one is able to buy ordinary shares that may be preferable to buying ADRs or funds in the U.S. Remember the stock universe in Japan is about 100x larger than the exchange listed ADR universe.

Here's a chart of the January returns of Japan ETFs and CEFs trading in the U.S.

Click to enlarge image

Disclosure: The author owns iShares MSCI Japan Index call options.