"This particular ETF [JDG] focuses on growth and quality," said Christopher Gannatti, associate director of research at WisdomTree. "It's a great way to capitalize on how companies are deploying cash, raising dividends, raising buybacks, taking advantage of that shareholder return theme."
The JDG tracks the fundamentally weighted WisdomTree Japan Dividend Growth Index, which measures the performance of dividend-paying common stocks with growth characteristics selected from the WisdomTree DEFA Index.
According to WisdomTree, "The growth factor ranking is based on long-term earnings growth expectations, the quality factor ranking is based on three-year historical averages for return on equity and return on assets, and the valuation factor is based on the earnings yield. Companies are weighted in the Index based on annual cash dividends paid."
Of the JDG's 217 holdings, NTT DoCoMo (DCM) is the highest weighted at 5.73%, followed by Nippon Telegraph and Telephone (NTT) at 5.32% and Japan Tobacco (JAPAF) at 4.53%. Only nine of the fund's holdings carry a weighting of more than 2% of total assets.
In terms of sector weightings, 20.2% of the fund is in consumer discretionary names, followed by 19.4% in industrials and nearly 15% each in telecommunication services and information technology.
The JDG, however, does not hedge its currency risk, a factor that has propelled WisdomTree's highly successful $18.4 billion dollar Japan Hedged Equity Fund (DXJ) to gains of more than 20% this year as the yen has weakened to 125 per dollar. Gannatti suggests investors use a combined approach of 50% hedged assets in a portfolio and 50% unhedged in order to control currency risk.
"The reality is that the yen, especially in the short term is difficult to predict. The yen recently hit 125 but a few weeks ago it would have been at 119. And why it went from 119 to 125 all of a sudden it's tough to know because nothing has really changed all that much," said Gannatti.
As for when the Japan story will come to an end, Gannatti says it's best not to target the yen's descent as a telltale sign of a top.
"They have a lot of room ultimately to go, and I really think this is just the beginning," said Gannatti.