Yen Strategy Pays Off for Now: DXJ vs. EWJ

NEW YORK (TheStreet) -- China and Europe continue to be the standout points of contention as we prepare to close the book on the first quarter of 2012. On a lighter note, however, major United States equity indices have managed to maintain their footing at historical and psychologically important levels. The Nasdaq, for instance, is seeing its strongest first quarter since 1998.

While the Nasdaq, S&P 500 and Dow Jones Industrial Average have become the poster children of strength over the past few months, they are not the only high fliers. On the contrary, in 2012, Japan's Nikkei 225 Index has also carved out a leadership role, surpassing the S&P 500 on a year-to-date basis. According to a report from Bloomberg, this rally has allowed it to power to its highest level since 2011's devastating earthquake, tsunami and nuclear crisis.

Improving global confidence has helped to fuel this iconic Japanese equity index's ascent. The nation's floundering currency has also played a crucial role in the rally.

The yen has been interesting to watch throughout the past year. Initially, following last year's string of disasters, the closely watched currency took off. In an effort to stem the negative impact of an excessively strong yen, the Bank of Japan has taken policy actions to rein in its strength, however.

Most recently, in February, the authority announced a plan to purchase 10 trillion yen worth of government bonds. So far, these moves have been effective in driving the currency lower; since the start of the year, the Currency Shares Japanese Yen Trust ( FXY) has tumbled more than 7%.

Japan-hungry investors can turn to a number of options in order to take aim at this developed marketplace. Each fund offers a different take, allowing individuals to customize their exposure to fit their specific outlook.

The largest and most popular way to target Japanese equities is the iShares MSCI Japan Index Fund ( EWJ). The fund is designed to cast a wide net over the country's marketplace, targeting more than 300 different companies. EWJ's underlying index is weighed using factors like market capitalization; meaning household names like Toyota Motor ( TM), Honda Motor ( HMC) and Canon are given top spots.

Since the start of the year, EWJ has managed to perform positively, gaining approximately 10%. The fund's performance, however, has been trumped by the WisdomTree Japan Hedged Equity ETF ( DXJ), which has gained nearly 17% during this period.

Rebranded from the WisdomTree Japan Dividend Index ETF during the opening half of 2010, DXJ mimics EWJ's focus on large and recognizable names comprising Japan's markets. However, the fund expands its approach further, by hedging against yen fluctuations. Since its unveiling, DXJ's currency strategy caused it to lag against EWJ. As the yen has tumbled, however, the bet has begun to pay off.

Investors who feel that more pain is in store for the yen on the road ahead may find DXJ to be an attractive bet on the future. However, with economic conditions showing improvement, the nation's central bank may find itself easing up on the stimulus gas pedal.

As long as the global outlook continues to improve, both DXJ and EWJ will likely see upward action. However, those looking to make a bet on which will outperform in the coming months may want to hold off until more yen-related clues are uncovered.

Written by Don Dion in Williamstown, Mass.

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At the time of publication, Dion Money Management did not own any equities mentioned.

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