NEW YORK (

TheStreet

) -- Japan has been on the outs as an investment destination for two decades. But there has been a shift in politics that may favor small-company shares.

Japan's problems include a government debt load that's about twice the size of the country's gross domestic product. Last week, Japan held an election that had a historic outcome. After more than 50 years of control by the Liberal Democratic Party (LDP), the election was won by the Democratic Party of Japan (DPJ). The DPJ is more conservative, in that it wants smaller government, though it's looking to institute a higher minimum wage and improve benefits for workers.

Additionally, the DPJ wants to enact policy that spurs spending at home, which stands to favor smaller companies. In Japan, the bigger companies that dominate the

iShares MSCI Japan Index Fund

(EWJ) - Get Report

are exporters. If the DPJ can be successful, small-cap stocks stand to outperform as they better capture the story on the ground in Japan.

The

iShares MSCI Japan Small Cap

(SCJ) - Get Report

, the

SPDR Russell/Nomura Small Cap Japan ETF

(JSC)

and the

WisdomTree Japan Small Cap Dividend Fund

(DFJ) - Get Report

offer easy access if the theme plays out and small caps outperform. Small companies, as measured by exchange traded funds, have beaten the benchmark Nikkei 225 Index.

The sector make-ups of all three ETFs are remarkably similar. Industrials have the largest weighting, in the mid-20s, followed by discretionary, at about 20%, and all three have a mid- to low-teen weighting to materials. The biggest difference at the sector level is that the iShares fund allocates 18% to financials. Interestingly, the iShares funds have lagged behind the other two. Despite similarities at the sector level, the respective top-10 holdings have only two names in common between the iShares and SPDR funds.

The dividends have been similar. The WisdomTree Fund has a trailing dividend yield of 2.02% versus 1.40% for the SPDR fund and 1.55% for the iShares ETF. The expense ratios range from 0.53% to 0.58%.

In addition to an enormous amount of debt, Japan has problems with an aging population and the need to import all of its oil. On the plus side, it's the world's second-largest economy, with a high-wage work force and well-educated population. It's difficult to make a bullish case for Japan but after two "lost decades," it's reasonable to believe that the country wants a change, as evidenced by the election result, and a newfound hope that a new party in charge cannot possibly do worse.

Small-cap ETFs allow investors to capitalize on that hope. Of the three ETFs, the iShares fund could come out on top if the DPJ is successful with its agenda. If it can make the Japanese consumer healthier, it stands to reason that this could mean good things for the financial sector.

At the time of publication, Roger Nusbaum had no positions in the securities mentioned.

Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback;

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