A Better Way to Play Japan

 

I’ve been researching ways to play Japan, with a goal to maximize upside while limited downside. I trimmed my HMC position today and sold out of SNE on Friday, so my Samurai exposure is quite limited at this moment in time. The yen is rallying, so naturally everyone is panicked out. When doing my homework in trying to limit my downside to Japan, choices were very limited due to the lack of Japanese stocks traded here. See unlike the Chinese fraudsters, the Japanese don’t care for our markets because they’re not looking to rip people off via accounting fraud gimmicks.

All roads led to ETFs, specially DXJ. It’s a fine blend of short yen, long Japanese equities and is likely the best way to play the reflation of Japan.

It’s no secret that asset managers do better than their investors. Just look at the shares of BEN, TROW, BLK or even GS and compare their stock returns to the returns of their funds and dollars to donuts says the stock did better. When asset managers are doing well, investors flock to them, helping to balloon their assets under management, which translates into a stronger bottom line.

Enter Wisdom Tree.

Wisdom Tree has been an innovator in managed ETFs. Their AUM are at record highs of $20 billion, thanks in large part of DXJ–which now has over $2 billion committed to it by investors. A staggering $576 million of inflows was reported the week ending 1/17, thanks to the popularity of the long Japan/short Yen thesis.

Providing this trend in Japan continues, WETF is going to be a major beneficiary, without having the risk of earnings shortfalls by Japanese corporations who are attempting turn arounds.

Considering the facts on the ground, I see very little risk to a downside earnings surprise in WETF. Moreover, as their ETFs gain popularity, the parent company will become an attractive takeover candidate for any asset management firm looking to broaden their ETF exposure.

I started a position in WETF this morning.

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