Investment managers have been largely enthusiastic about Japan and Europe this year with the weakening of their respective currencies and the slide in oil prices. To take advantage of the success of the so called “Abenomics,” Deutsche Asset & Wealth Management, the fund manager known for its innovative international exchange-traded funds, launched a new Japan-focused fund to help investors take exposure in Asia’s second largest economy in a unique way.
The newly launched Deutsche X-trackers Japan JPX-Nikkei 400 Equity ETF (JPN) follows Japanese Prime Minister Shinzo Abe’s vision of smart beta: an index that follows “high appeal” Japanese companies.
JPN is the first US ETF to follow the JPX-Nikkei Index 400–a benchmark launched in January 2014 in an attempt to coax Japanese companies into becoming more efficient and transparent.
The underlying index was jointly developed by Nikkei, the Japan Exchange Group and the Tokyo Stock Exchange and seeks to meet global investment standards, including efficient use of capital and investor focused management perspectives.
It screens the Japanese equity universe based on three parameters; cumulative operating profit, market capitalization, and return on equity. The index then selects 400 companies with the highest capital efficiency and return in equity.
The traditionally-conservative Japanese companies are flush with cash—even more cash than their US counterparts. But holding excess cash doesn’t improve ROE, which explains why Japanese stocks have historically given low returns on equity compared to their US cousins.
Institutional investors are likely to view JPN favorably since the companies that get added to the index get a de facto government approval of excellence. Both the Japanese central bank and the massive Government Pension Investment Fund have made the JPX-Nikkei Index 400 their preferred equity benchmark.
The index holds all the major Japanese multi-nationals including Toyota Motor, Honda Motor, Canon, Mitsubishi UFJ Financial, FANUC and Mizuho Financial.
The fund charges 40 basis points annually.
Disclosure: No holdings