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A Foreign Stock ETF For A Rapidly Declining Currency

20 December 2012 at 3:09 pm by Gary Gordon     Bookmark and Share    Follow EtfExpert on Twitter

Throughout 2012, I chose ETF assets that offered twice the annual cash flow of what the 10-year U.S. treasury yielded. This meant pursuing capital appreciators and/or yield producers with a 3.0%-4.0% annualized income stream.

In the stock world, many client portfolios contained iShares MSCI Australia (EWA), WisdomTree Dividend Ex Financials (DTN), Vanguard High Dividend Yield (VYM) and iShares MSCI Malaysia (EWM). Real estate investment trusts (REIT) like Plum Creek Timber (PCL) and REIT ETFs like SPDR Dow Jones Global Real Estate (RWO) also fit the bill.

From the land of higher-yielding income, clients benefited from funds like iShares Preferred (PFF), SPDR High Yield (JNK) as well as Guggenheim Multi-Asset Income (CVY). Even investment grade bond ETFs like PowerShares Emerging Market Sovereign (PCY) and Vanguard Intermediate Corporate (VCIT) figured prominently.

Simply put, when the return on cash is 0%, and when the return on a 10-year treasury is less than a realistic index for inflation, one should expect the demand for viable alternatives to remain strong. And throughout the past 12 months, selecting investments with 2x the annual yield of the 10-year proved to be a venerable approach.

In truth, I do not expect investor demand to change all that much in 2013. Central banks around the world will continue to suppress developed-country bonds, forcing investors to move further up the risk ladder.

That said, there are reasons to believe that some of the least income-friendly stock ETFs are about to see super-sized price gains. And for those who enjoy challenging conventional wisdom, the WisdomTree Japan Hedged Equity Fund (DXJ) may worthy of a look.

Japan has a spending problem such that its budget as a percentage of GDP rivals Greece and Egypt. Yet the world’s third largest economy may still find a way to grow, now that the country has a new prime minister.¬†Shinzo Abe is determined to weaken the yen through aggressive monetary policy, theoretically making¬†Japan’s exports more competitive worldwide.

In truth, the anticipation of monetary policy intervention has had a strong hand in propping up Japanese equities already. Unfortunately, hedged stock ETFs like iShares MSCI Japan (EWJ) have been hindered by the currency declines.

Enter the dollar-hedged alternative, WisdomTree Japan Hedged Equity (DXJ). In the same manner that WisdomTree Europe Hedged Equity (HEDJ) takes the euro out of play for investors intrigued by European brand name biggies, DXJ is doing the same for Japanese corporations. In fact, DXJ has doubled EWJ on the year, 16% to 8%.

Assuming the yen continues to weaken in 2013, DXJ may be the ideal ticket to profit from the “Land of the Rising Sun.” Still, DXJ’s vertical move higher over the last 5 weeks suggests waiting for a 4%-5% pullback.

DXJ 50 200

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Disclosure Statement: ETF Expert is a web log (‚ÄĚblog‚ÄĚ) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc., and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

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