iShares, the ETF platform of BlackRock, has launched the world’s first physically-backed GBP currency-hedged Japanese equity ETF, providing access to the Japanese equity market whilst reducing currency risk for sterling-referenced investors. The launch comes just a month after Deutsche Bank listed the synthetically-replicated db X-trackers MSCI Japan GBP Hedged TRN Index ETF (XMJG) on the London Stock Exchange (LSE).
Listed on the LSE, the iShares MSCI Japan Monthly GBP Hedged ETF (IJPH) offers exposure to over 300 of the largest Japanese companies, equating to approximately 85% of the entire listed Japanese equity market on a market-capitalisation basis.
The fund physically invests in individual index securities and is optimised to track the performance of the MSCI Japan 100% Hedged to GBP Net Total Return Index, holding a sub-set of the index’s constituents. Constituent holdings comply with MSCI’s size, liquidity and free float criteria.
The make up of the Japanese economy means the fund has a particular focus on industrial, consumer discretionary, financial, and technology companies. Major holdings including Toyota Motor Company, Mitsubishi UFJ Financial Group, Honda Motor Company, Sumitomo Mitsui Financial Group, Mizuho Financial Group, Canon and Softbank.
The Japanese economy has come into focus as the country recovers from last year’s tragic natural disaster and as investors look for safe havens amid ongoing turmoil in Europe. Katsuaki Ogata, CIO of Japan Value Equities at AllianceBernstein, recently said that Japanese equities offer an “exceptional investment opportunity”, adding that, “although Japanese stocks significantly lagged global markets in 2011, due in part to the effect of last year’s earthquake, this has made the Japanese market available at historically attractive prices”. [See Japanese equity ETFs offer access to “exceptional investment opportunity”]
The potential overvaluation of the Japanese yen has concerned some foreign investors who fear that a reversal in yen strength could undermine equity returns. The prospect of a weaker yen, especially as the Bank of Japan opens up to the idea of monetary easing policies, such as asset purchases, has strengthened the case for currency-hedged funds, such as this latest fund from iShares.
Investors in the iShares MSCI Japan Monthly GBP Hedged ETF will be protected from the effects of fluctuations in the sterling-yen exchange rate through currency hedging, the process of fixing exchange rates through the use of foreign exchange forward contracts. [For more on currency-hedged ETFs, see Currency-hedged ETFs prove their worth as investors seek safe havens]
This hedging process minimises the risk of any movement between the fund’s base currency (GBP) and the currency of the underlying securities (JPY), whether adverse or favourable to performance. The fund will be hedged on a monthly basis and, for efficiency and independence, all currency hedging will be outsourced to State Street Bank.
Stephen Cohen, head of the iShares’ EMEA Investment Strategies and Insights team, said, “Investors are increasingly looking to international markets to diversify portfolios and generate returns, but there is a risk that currency rates can move against them. Through this fund, investors can take a new look at Japan, with the knowledge they will receive flexible, cost-efficient and transparent exposure to Japanese equities with in-built protection against currency movements.”
The iShares MSCI Japan Monthly GBP Hedged ETF, which has a total expense ratio (TER) of 0.64%, expands iShares’ currency-hedged equity ETF range which includes five existing currency-hedged ETFs:
iShares MSCI Japan EUR Hedged ETF (IJPE)
iShares MSCI World EUR Hedged ETF (IWDE)
iShares MSCI World GBP Hedged ETF (IGWD)
iShares S&P 500 EUR Hedged ETF (IUSE)
iShares S&P 500 GBP Hedged ETF (IGUS)