What is FLJH? (Pros, Cons, and Strategies)

Investors seeking opportunities in the Japanese equity market often look for convenient and efficient vehicles to manage currency and market risk. One such investment vehicle is FLJH (Franklin FTSE Japan Hedged ETF). This ETF offers exposure to the Japanese stock market while mitigating the effects of currency fluctuations. In this blog post, we'll explore what FLJH is, alongside its advantages and disadvantages, and discuss some potential investment strategies.

What is FLJH?

FLJH stands for Franklin FTSE Japan Hedged ETF. It is an exchange-traded fund (ETF) designed to provide investors with investment results that closely correspond to the performance of Japanese stock markets but hedged against fluctuations between the U.S. dollar and the Japanese yen.

FLJH tracks the FTSE Japan Capped Hedged to USD Index, ensuring that investment returns are primarily influenced by the performance of the underlying Japanese companies rather than by currency rate changes.

Key Features of FLJH

• Exposure to the Japanese equity market
• Currency hedging to minimize the impact of yen/USD exchange rate fluctuations
• Generally comprised of large, mid, and small-cap stocks

By investing in FLJH, investors gain access to a diversified portfolio of Japanese companies, irrespective of significant currency exchange movements, making it a versatile addition to a global investment portfolio.

FLJH Composition

The composition of FLJH includes various sectors such as industrials, consumer goods, information technology, and healthcare. It features prominent Japanese companies like Toyota Motor Corporation (7203), Sony Group Corporation (6758), and SoftBank Group Corp. (9984). This diverse assemblage allows investors to tap into the overall growth potential of the Japanese economy while mitigating individual company risk.

Pros of FLJH

Currency Hedging

One of the most significant advantages of FLJH is its currency hedging feature. Exchange rate fluctuations can significantly impact the returns on international investments. By hedging against the Japanese yen's volatility in relation to the U.S. dollar, FLJH reduces the risk associated with currency movements, allowing investors to focus on performance in the Japanese equity market.

Diversification

FLJH provides exposure to a wide range of sectors in the Japanese economy. This diversification helps spread risk across different industries, which can be particularly beneficial if one sector underperforms. By investing in this ETF, investors can gain broad market exposure without needing to pick individual Japanese stocks.

Low Expense Ratio

FLJH boasts a competitive expense ratio, common in many of Franklin's ETFs. A lower expense ratio means a larger portion of the investment's earnings is retained by the investor rather than going towards management fees, which is advantageous, especially in long-term investment scenarios.

Attractive Growth Potential

Japan's economy has shown resilience and continuous innovation, particularly in sectors such as technology, automotive, and industrial manufacturing. By investing in FLJH, investors can capitalize on the growth potential of well-established Japanese companies and the innovation-driven segments of the economy.

Cons of FLJH

Market Risk

Like any equity investment, FLJH is subject to market risk. Although the ETF provides broad exposure across sectors, it can still be significantly affected by overall market downturns in Japan. Economic challenges, natural disasters, or geopolitical events could impact the Japanese stock market, thereby affecting FLJH's performance.

Potential Lower Returns due to Currency Hedging Costs

Although hedging minimizes currency risk, it does come at a cost. These hedging expenses might slightly reduce the overall returns compared to an unhedged investment. Investors must weigh the benefits of reduced currency risk against the potential drag on returns due to hedging costs.

Limited Growth in Specific Sectors

While FLJH offers diversification, it includes a broad mix of industries that may provide varied growth rates. Some sectors may hold back overall gains, especially if specific industries face decline. Investors anticipating high returns from high-growth sectors might find broader, diversified ETFs more limiting.

FLJH Investment Strategies

Given its hedging characteristics and market focus, FLJH presents interesting opportunities for investors with varied risk tolerances and investment horizons. Here are a few strategies to consider:

Long-term Investment Strategy

FLJH is particularly suitable for investors who are looking at a long-term horizon. The stability provided by currency hedging combined with the diversified exposure to the Japanese market makes it a reliable option for those seeking steady growth over 10 years or more. Investors can benefit from Japan’s economic growth trajectory and mitigate prolonged currency risks.

Currency Diversification Strategy

For investors heavily invested in U.S. markets or other single-currency investments, FLJH can provide necessary geographic and currency diversification. This hedged ETF helps stabilize the portfolio's overall performance by safeguarding against the fluctuations in currency exchange rates while still gaining international exposure.

Sector-Specific Investment Strategy

For those keen on diving deeper into specific sectors in Japan, FLJH can serve as a stable base. Investors can use it in conjunction with other sector-focused ETFs or individual stocks to tilt their portfolio towards high-growth industries within the Japanese economy.

By understanding these strategies, investors can utilize FLJH to meet their specific financial goals while effectively managing the associated risks.

In summary, FLJH offers a well-rounded approach to investing in the Japanese stock market, combining the benefits of diversified equity exposure with the security of currency hedging. Its low cost and attractive growth potential make it a compelling option for long-term investors seeking international diversification. However, like any investment, it's essential to carefully weigh the pros and cons and align it with your overall investment strategy.