Japan: Weekly ETF and CEF Performance

Japanese ETFs trading in the U.S. managed to recoup only some of their prior week's losses. Frustrated with the performance of your Japan investments? Read this week's coverage, which includes background on why Japan is lagging in '07.

The Nikkei rallied for a third straight Monday (5/28), but the past two weeks it failed to extend gains through the end of the week.

At 17,587 as of Monday's close, the Nikkei 225 remains around 4.0% off its 52-week and multi-year high of 18,300.39 (intra-day; it closed at 18,215.35) set on Feb. 26. (See chart below: 5/28)

The 10 Japanese ETFs (including 2 CEFs) trading in the U.S. gained a combined average 0.3% last week, but are down 1.2% for the year. As mentioned last week, they are severely underperforming other regional ETFs, based on an analysis of iShares Asia region country-based ETFs.

Here's their combined average return over the past several weeks:

05/11 - 05/18: -3.4%
05/04 - 05/11: +0.4%
04/27 - 05/04: +0.8%
04/20 - 04/27: -1.7%
04/13 - 04/20: +0.6%
04/05 - 04/13: -0.9%
03/30 - 04/05: +0.7%
03/23 - 03/30: -2.1%

See the chart below for more details of last week's and ytd returns.

Click to enlarge chart

Disclosure: The author does not own shares of any funds mentioned in this article.

The Japan Smaller Cap Fund (JOF), one of two closed-end Japan funds, led all advancers, +2.2%, after dropping more than 9.0% two weeks ago. It is down 12.7% year-to-date. The Japan Equity Fund (JEQ) [closed-end] gained 1.3%, returning to positive territory (0.1%) for the year.

Vanguard's Pacific Stock ETF (VPL) continues to lead all Japan ETFs year-to-date (+4.0%), but instead of benefiting from its diversified holdings including Australia, Hong Kong and Singapore, it was actually held back last week, as stocks in these countries faced selling pressure. It was the biggest decliner last week at -0.6%.

iShares MSCI Japan Index (EWJ), the most actively traded country-based ETF, gained 0.2% and is up 0.5% for the year.

As reported in recent weeks, the yen continues to trade near an all-time low against the euro and is now at more than a three month low around the 121.5 level against the US$. The yen looks poised to trade lower, as explained in "Weak Yen Likely to Weaken Further Ahead of Bonus Payouts." See the chart below of the CurrencyShares Japanese Yen Trust (FXY) ETF, which was launched earlier this year.

Also, as I included in my coverage of weekly Japanese ADR returns, please read the following from Japan Investments' May 23rd newsletter explaining why Japanese stocks are not joining the near-global stock rally:

Foreign stock markets are rushing ahead to new highs and Tokyo stays dead flat, why?

I. The Tokyo Stock Exchange's current supply-demand situation easily explains the current level. In fact, most Japanese institutional investors have consistently sold since autumn 2006; domestic capital flows are focusing on BRICs new investment trusts (over the top I believe).

II. Onshore investment trusts focusing on long-only Japanese equities are experiencing net outflows of capital. Looking at January-April, the Japan Investment Trust association, or Quick QBR, statistics clearly show ¥530 billion net capital outflow from Japanese long-only equity investment trusts.

III. On the other hand, for the same period, there was a net inflow of ¥2.55 trillion in foreign equity long-only type investment trusts. The yield gap between Japanese and foreign equities investment trusts lead to simple arbitrage, no surprise Japanese pension funds were also net sellers; investment trusts have been net sellers for nine months in a row.
(Minor edits were made to the original text for style and formatting purposes.)

The report goes on to say TSE data shows life and non-life insurers and city and regional banks were all net sellers of Japanese for the five months up to this month. Overseas investors have more often than not been buyers, but domestic retail investors are more mixed, apparently buying on sell-offs and taking profit quickly on rallies.

One bullish note however, is a "Japanese equities investment fever" taking place among Asia's wealthy, as they increase their allocations to Japan.

Also, for those interested in a better way to capture the Nikkei 225 Index (note: iShares Japan does not track the N225), please read Jay Buster's (editor of Protected Stocks) latest update.

For your reference, here's a list of the 10 funds surveyed in this weekly summary:

iShares MSCI Japan Index (EWJ)
iShares S&P/TOPIX 150 (ITF)
Japan Equity Fund, Inc. (JEQ)
Japan Smaller Capitalization Fund, Inc. (JOF)
SPDR Russell/Nomura Prime Japan (JPP)
SPDR Russell/Nomura SmallCap Japan (JSC)
Vanguard Pacific Stock (VPL)
WisdomTree JP High-Yielding Equity (DNL)
WisdomTree JP SmallCap Dividend (DFJ)
WisdomTree JP Total Dividend (DXJ)