Short Japan with these Inverse ETFs - ETF News And Commentary

The world’s third largest economy, Japan, is heading towards growth after 20 long years of stagnation. The signs can be easily seen in Japan’s Nikkei Index, which rose by almost 35% this year thanks to the government’s stimulus policies. This was mainly fired by Shinzo Abe’s win in the election which brought hopes for an early economic recovery in the country.

To add more to the story, Japan’s economy marked the third quarter of expansion with its economy growing at an annualized rate of 3.6% in the April-June period. This shows that Shinzo Abe’s programs have kept the sun shining on Japan’s equity markets at least in the short term (read: Japan ETFs Surging, Is the Country Back on Track?).

Trouble on the horizon?

Despite the good news, a stronger yen lately has worried many. The yen has rallied over the dollar for the past six weeks on fears that the Bank of Japan will refrain from more stimulus, thus upsetting exporters in Japan.

After all, a strong yen blunts the overseas competitiveness for Japanese exporters and also affects their dollar earnings when profits are repatriated (read: Japanese Yen ETF Investing 101)

Currently, the picture looks cloudy for Japan markets. For a while the yen has been trading inversely to the Japanese shares, and if the  yen strengthened, the Nikkei would fall.

The yen is at a six-week high and it has disappointed exporters, and earnings could be in trouble as well. As a result, the Nikkei 225 index has been weak lately, with many investors questioning long term holdings in the market, especially if more stimulus isn’t coming to boost the still sluggish country.

Given this rocky situation and extreme volatility, many traders have likely been having a field day with the Japanese market of late. After all, the country is home to an extremely liquid market, while the big daily moves have made short-term opportunities pretty widespread (read: Inside the Crash in Japan ETFs)

While investors can go long in Japan with popular ETFs like EWJ, NKY, or DXJ, a better short term option could be to go short in the country. This could be an excellent choice if more stimulus measures aren’t announced, or if the country, which has run-up significantly in 2013, falls back to close out the year.

There are two options for investors in this space that focus on the Japanese market. We have highlighted both below for traders looking for short term options that could benefit significantly from a slide in Japanese shares:

ProShares UltraShort MSCI Japan (EWV)

Launched in November 2007, EWV seeks daily investment results, before fees and expenses, that correspond to two times the inverse (-2x) of the daily performance of the MSCI Japan Index.

The fund holds a wide variety of firms and has positions in 318 companies. The top 10 holdings contribute about 24% to the fund. Apart from a high concentration in large cap stock, the product is complemented by mid cap stocks.

Consumer Discretionary, Financials and Industrials take the top 3 spots adding about 68% in its sector holdings. Toyota Motor, Mitsubishi Financial and Honda Motor Corp occupy the top 3 company spots.

The fund is expensive as it charges a hefty 95bps in fees and is also unpopular because of the high risk tolerance. Moreover the product has a low AUM of $9.4 million but a trading volume of 100,000 shares a day.

Direxion Daily Japan Bear 3X Shares (JPNS)

Launched in Jun 2103, JPNS seeks daily investment results, before fees and expenses, of 300% (-3x) of the inverse of the performance of the MSCI Japan Index.

JPNS is also kind of pricey, as it charges a hefty 95bps in fees. Consumer Discretionary, Financials and Industrials take the top 3 spots in the fund, comprising 61% of the total.

The fund has amassed $3.1 million so far in assets and has a very low average daily trade of 4600 shares a day. Due to this, the fund might have a wide bid ask spread, though it could be a very active ETF.

Bottom Line

When the market moves in a negative trend, leveraged and inverse ETFs can be solid plays for investors. These can add significantly in a few days, so long as the market is moving in the right direction.

However, due to the daily resetting nature of these leveraged ETFs, they probably shouldn’t be used by long-term investors. Instead, they should be utilized by those seeking to make a short-term bet on the direction of the Japanese stock market. With the kind of volatility that Japanese markets have been seeing, there is definitely money to be made with this strategy, though risks are undoubtedly high.

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WISDMTR-J HEF (DXJ): ETF Research Reports

ISHARS-JAPAN (EWJ): ETF Research Reports

PRO-ULS MSCI JA (EWV): ETF Research Reports

DIRX-D JPN 3XBR (JPNS): ETF Research Reports

MAXIS-NIK 225 (NKY): ETF Research Reports

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