This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
$1 buys you full access to ALL of TheStreet's Subscription Services! Learn More

Japan ETF Will Hedge Currency Risk

Stocks in this article: DXJ

As mentioned before, DXJ will continue to hold a portfolio of Japanese stocks, but starting April 1 the fund will offset the currency risk to Japanese yen by selling forward contracts. If DXJ had been using this strategy in the past month, it would have returned something closer to the MSCI Japan Index's 8.2% return, instead of 4.4%.

Earlier this year, WisdomTree launched the WisdomTree International Hedged Equity Fund (HEDJ). The portfolio is the same as WisdomTree DEFA Fund (DWM) but comes with currency protection. DWM charges 0.48% in fees, while HEDJ charges 0.58%, an added cost of 0.1% for currency protection against multiple currencies. The cost to investors for this currency protection is nothing. For DXJ, there's only one currency to hedge, and the yen is one of the most widely traded currencies in the world.

The new hedged ETF option increases the choices for investors. Let's look at four possible scenarios.

When both a nation's currency and its stock market rise, investors can buy an unhedged foreign stock ETF and gain exposure to both. The updated DXJ, however, will be a bad choice in this scenario because the foreign investor will give up currency gains.

When a nation's currency and its stock market fall, investors want to hold neither stocks nor currency.

When a nation's currency falls but its stock market rises, investors previously might have chosen to stay out of that market, because the currency decline could overwhelm the rise in stocks. However, with DXJ, investors can benefit from a rise in Japan's stock market while avoiding losses from a decline in the yen.

In the final scenario, a nation's currency rises but its stock market falls. In this case a fund like DXJ will suffer the largest losses, because it will be hurt by the currency change and by the declining value of the stocks. In such a case, investors will either want to stay out of the market or hold only the currency.

Lastly, one interesting use for DXJ would be if Japan enters a period of hyperinflation. Japan's large debt burden, which has grown during a 20-year period when the economy has basically been stagnant, has some investors wondering whether serious inflation is in the country's future.

2 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,814.94 -2.96 -0.02%
S&P 500 2,067.03 -2.38 -0.12%
NASDAQ 4,758.2520 +3.36 0.07%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs