ETFs to Profit if the Bank of Japan Adopts Further Quantitative Easing

Morningstar passive fund analyst Kenneth Lamont explains how foreign currency fluctuations can impact returns - and the Japanese equity ETFs that mitigate these risks

Emma Wall 18 August, 2016 | 3:20PM
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Emma Wall: Hello, and welcome to the Morningstar series, "Ask the Expert." I'm Emma Wall and I'm joined today by Morningstar Passive Fund Analyst, Kenneth Lamont.

Hi, Kenneth.

Kenneth Lamont: Hello, Emma.

Wall: So, we're here today to talk about Japan and in particular, the Japanese currency, the yen. It's at an all-time high at the moment despite previous efforts by the Bank of Japan to depreciate the currency. What effect does a high yen have on the economy and indeed, on the stock market?

Lamont: Well, the Japanese stock market is famous for being – or many of the companies within the Japanese stock market are famous for being export-orientated, such as your Toyotas or your Sony who sell all around the world. And of course, if the yen is higher than the currencies that are being sold to then those goods are more expensive in those countries and it's very difficult for the Japanese companies to be as competitive when selling.

Wall: And of course, the Bank of Japan will want to make its country as attractive for foreign investment as possible. One way of doing this is through monetary policy. Now, they've already got incredibly low interest rates, so that lever out of the way. What about quantitative easing?

Lamont: Well, this is an option at the moment. Should they undertake quantitative easing, this is likely to or it has in the past produced boost to the stock market and also it helps devalue the yen.

Wall: And for investors who want to get exposed to the Japanese stocks and indeed, want to have the concern about the currency taken off their hands, there are particular ETFs that do that for them, aren't there?

Lamont: Well, there are and historically, some investors in Japan and indeed, many foreign countries have been stung by the currency returns. So, even though the foreign stock market is rising, the falling currency, as you're getting paid in that currency, actually erodes or can completely negate the profits that you make.

So, one way in which specifically U.K investors can invest and take advantage of this play in the Japanese market is to invest in a currency-hedged ETF. One of the best of the GBP-hedged bunch is the Amundi Nikkei 400 ETF. This, as I said, is hedged into GBP. So you're protected on a daily basis against falls and it allows you to participate in any rise in the stock market.

Wall: And what about an alternative ETF?

Lamont: Those looking for plain vanilla cap-weighted alternative may consider the UBS MSCI Japan GBP-hedged Fund which charges 45 basis points.

Wall: Kenneth, thank you very much.

Lamont: Thank you, Emma.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Emma Wall  is former Senior International Editor for Morningstar