Do Japan ETFs Still Have Upside Potential?

That was the question posed in “Japan ETFs: Still Room To Run?

In the days after the earthquake and tsunami in Japan, opportunistic investors pumped record amounts of cash into exchange-traded funds that invest in Japanese companies. But now, more than two weeks after the disaster, is the bargain hunting over?

Japan ETFs are the quickest and easiest way for investors to get in out of the market. And in the week after the earthquake hit on March 11, investors poured $936 million into Japan ETFs, according to fund research company Lipper — roughly double the previous record for inflows set more than six years previously. The next week, investors added another $832 million, bringing the two-week total to nearly $1.8 billion. And while 80% of those inflows went to the $7.3 billion iShares MSCI Japan Index fund ( EWJ: 10.42*, +0.13, +1.26% ) , six of the eight Japan ETFs took in new money; in comparison, Japan-only mutual funds had outflows of $27 million. “People looked at the huge sell-off in Tokyo on March 14 and thought, ‘Oh this is the perfect opportunity to get in on a good bounce-back,’ ” says Jeff Tjornehoj, senior analyst at Lipper.

Those early investors were handsomely rewarded. An investor who purchased shares of the iShares MSCI Japan Index fund on March 16, a day after the Nikkei 225 hit a recent low of 8,200, gained 7% that day and 12% through March 22, according to EPFR Global. But while Japanese stocks still haven’t fully snapped back since the initial sell-off – shares have been flat since last Wednesday – they’re also no longer much of a value play, says Alec Young, international equity strategist for Standard & Poor’s Equity Research. “We had a tremendous short-term trading opportunity caused by the 20% decline in Japanese stocks. But that’s been cut significantly and a this point we think the market is fairly valued.”

Sure, if you are a dip buyer, the great opportunity may have passed, but if you are a trend follower, the opportunity still exists. As I posted a couple of weeks ago, I like to see the trend line broken to the upside again before I would consider any position.

Well, the recent recovery pushed the price of EWJ above its trend line by +2.72% (as of last Friday). Given the fallout from the double natural disaster, along with the nuclear aftermath, there could be more dangers lurking, which could bring the downside back into play.

To me, EWJ is a risky proposition and simply does not fit it with my current portfolio mix.

Chart courtesy of YahooFinance

Disclosure: No holdings

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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