WisdomTree believes Japan could represent one of the best equity markets over the coming years. The Bank of Japan (BOJ) introduced new stimulus tools in January 2016, and we expect it to continue to add to this easing over the coming months and years. Previously, we discussed the approach for the WisdomTree Japan Quality Dividend Growth strategies, which we offer on both a currency-hedged and –unhedged basis: The WisdomTree Japan Quality Dividend Growth Fund (JDG) and the WisdomTree Japan Hedged Quality Dividend Growth Fund (JHDG).
Below, we illustrate some of the fundamental data points that we think are the most important attributes when considering our Japan Quality Dividend Growth exchange-traded funds (ETFs).
The Underlying Index Methodology
The Japan Quality Dividend Growth ETFs track the performance of two Indexes:
• JDG is designed to track the performance of the WisdomTree Japan Quality Dividend Growth Index, before fees.
• JHDG is designed to track the performance of the WisdomTree Japan Hedged Quality Dividend Growth Index, before fees.
The sole difference between these Indexes is that one is hedged while the other is unhedged—both select the same 300 companies that rank best on quality factors (three-year average return on equity [ROE] and three-year average return on assets [ROA]) and a growth factor (based on long-term earnings growth expectations). These Indexes also include a dividend-weighting element, which is designed to increase focus on higher-dividend-yielding stocks.
Higher Dividend Yields: Due to the dividend-weighting component, these two funds have tended to have higher average dividend yields than the MSCI Japan Index since their earliest common inception date, May 28, 2015. The MSCI Japan Index is a market capitalization-weighted index and does not have a dividend focus in its methodology.1
Lower Price-to-Earnings (P/E) Ratios: Neither the MSCI Japan Index nor either of the two WisdomTree Japan Quality Dividend Growth ETFs focus on P/E ratios in their approach, but the Quality Dividend Growth strategy is currently selling at lower P/E ratios.2
Higher Earnings Growth Estimates: The two WisdomTree Japan Quality Dividend Growth ETFs have a considerably higher expected growth estimate than the MSCI Japan Index. This is likely because the selection factor for the methodology includes earnings growth as part of the screening criteria, whereas this is not a factor in the MSCI Japan Index’s approach.3
Higher Historical Dividend Growth: While the Quality Dividend Growth strategies’ methodology was designed to be a forward-looking dividend model to increase the probability of identifying companies that can raise their dividends at above-average rates, looking historically, the companies in JDG and JHDG as of February 5, 2016, have raised their dividends by more than 5 percentage points faster than the companies in the MSCI Japan Index over the last one-year, three-year and five-year periods. This is an important point: The strategies offer an advantage in current dividend yield as well as past dividend growth rates.4
For those investors who believe, like us, that Japan represents an attractive investment environment in the developed world, there are many options to gain exposure. The case for the Quality Dividend Growth strategies is fundamentally driven: These are companies we currently see selling at relatively attractive valuations that have good earnings growth prospects. Additionally, the current constituents have shown to be good capital stewards by raising their dividends at above-average rates, and we believe they will continue to do so.
1Source: Bloomberg, for period from 5/28/15 to 2/5/16, the longest period shared by JDG and JHDG.
2Source: Bloomberg, with data as of 2/5/16.
3Source: Bloomberg, with data as of 2/5/16.
4Source: Bloomberg, with data as of 2/5/16. This refers to the current constituents of JDG and JHDG and does not imply that either of these Indexes has one, three or five years of live history.
Important Risks Related to this Article
There are risks associated with investing, including possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Funds focusing their investments on certain sectors may be more vulnerable to any single economic, regulatory or sector-specific development. This may result in greater share price volatility.
The Funds focus their investments in Japan, and they may be significantly impacted by events and developments in Japan that can adversely affect performance. Dividends are not guaranteed, and a company currently paying dividends may cease paying dividends at any time. As these Funds can have a high concentration in some issuers, the Funds can be adversely impacted by changes affecting those issuers. The Funds invest in the securities included in, or representative of, their Indexes regardless of their investment merit, and the Funds do not attempt to outperform their Indexes or take defensive positions in declining markets.
The currency-hedged Funds use various strategies to attempt to minimize the impact of changes in the Japanese yen against the U.S. dollar, which may not be successful. Derivative investments can be volatile, and these investments may be less liquid than other securities and more sensitive to the effects of varied economic conditions. Due to the investment strategy of these Funds, they may make higher capital gain distributions than other ETFs. Please read each Fund’s prospectus for specific details regarding each Fund’s risk profile.