China and India tend to dominate the conversation when it turns to investing outside of the U.S. Such widespread acceptance of these two obvious choices makes it the perfect time to explore unmentioned opportunities. Japan is well known as a dominant force in consumer electronics and automobiles, but $140-per-barrel oil is enough to curb consumer spending and limit the sales of goods that drive Japan's economic engine.
Japan is down right now, and the temptation may be to try a little bottom fishing. In this article we'll explore several Japan-focused exchange-traded funds (ETFs) to see if this is a viable strategy.
Japan Focused ETFs
- Ishares MSCI Japan Index ETF (AMEX:EWJ) trades below $13 and has over 350 stock holdings. Its largest position is in Toyota Motors (NYSE:TM) followed by Mitsubishi (NYSE:MTU), Canon (NYSE:CAJ), Nintendo and Sumitomo Mitsui Financial Group rounding out the top five.
- PowerShares FTSE RAFI Japan ETF (AMEX:PJO) trades below $44 and has just over 320 stock holdings. Its largest positions are similar to EWJ with the exception of Honda Motors (NYSE:HMC) replacing Nintendo among its top five. (If you're an investor who likes to understand how and why your investment products work, check out An Inside Look At ETF Construction.)
Market Sensitivity
Since the beginning of the year, PJO has slightly outperformed EWJ. PJO is down 6% while EWJ is down 7%. Over the past two years both Japanese focused ETFs have closely tracked the performance of the S&P 500. Taking a look back from to the peak of the Dow Jones Industrial Average peak in early October of last year through the later part of June of 2008, PJO proved more resilient dropping nearly 8% while the PowerShares fell approximately 17%.
Both ETFs use the Morgan Stanley Capital Index Europe, Asia and Far East (EAFE) index as their benchmark. Since the beginning of the year, the EAFE index is down 14%.
Growth Drivers
Automobiles, financials and consumer electronics dominate the top holdings of these Japanese focused ETFs suggesting that strong consumer sentiment is a key factor for their success. Consumer spending in the U.S. is down as the credit markets continue to clear out and as fears of a recession loom. Record food and oil prices are also a likely culprit of depressed consumer spending on a global scale. (To learn more on consumer sentiment, read Consumer Confidence: A Killer Statistic.)
Conclusion
International investing should be approached with a long term horizon and the acceptance of additional risk. Signs of economic recovery in the U.S. and Japan have yet to surface; meanwhile, energy and food prices continue to climb. It's difficult to guess the bottom, which means it may be better to invest in Japan later versus now.
