New ETF offers value in Japan with sterling protection

Deutsche Asset Management this week listed the db x-trackers JPX-Nikkei 400 UCITS ETF GBP hedged (DR) (XDNG) on the London Stock Exchange with an ongoing charge of 0.3 per cent, adding to the small but growing range of ETFs tracking the new index.

Japan has been a persuasive case for investors over the past three years as stocks have risen sharply following the election of Prime Minister Shinzo Abe in 2012. Japanese stocks were up by more than 60 per cent in local currency terms in the two years to February 2015 and the MSCI Japan index has returned 106.09 per cent in the three years to date.

The JPX-Nikkei 400 has been a particularly popular index to make the most of those gains since it launched in 2014. It uses three-year average returns on equity (RoE), operating profit and market value in order to hone in on the companies expected to deliver the best shareholder value. Inclusion in the index is a badge of honour for Japanese companies and major institutions have already piled in to it. One of the world's largest pension funds - Japan's £734bn Government Pension Investment Fund - has adopted the index and ETF providers have been quick to join it.

There are still only a small number of ETFs giving access to the index and XDNG is one of the few physically replicating, sterling-hedged products available. Due to the rapid weakening of the yen against sterling, currency hedging in Japan has been key to investor returns over the past two years. Lyxor also offers a GBP hedged product for an ongoing charge of 0.25 per cent, but many others are either euro or dollar hedged and do not offer the same benefits as a sterling investor converting returns.

Adam Laird, head of passive investing at Hargreaves Lansdown, says: "This is an exciting index. The appeal is that it looks at company performance and also those that have good attributes. It is trying to find those companies that are well managed, with good corporate governance, and it has performed well since the index was launched just over a year ago."

However, he cautions that we don't know how the index will perform over the long run and he prefers a longer track record on a product before he would fully commit.

"Deutsche's product is GBP hedged, which is positive in Japan, and the fact it is physically replicating is also good for investors as it holds the underlying shares," he says. "It is definitely worth considering this index but it is not the only way I would invest in Japan."

JPX-Nikkei ETFs listed on the London Stock Exchange