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

Investing in international stocks can provide diversification benefits and potential growth opportunities. However, doing so often exposes investors to currency risk, which can affect returns. This is where funds like the iShares Currency Hedged MSCI Japan ETF (HEWJ) come into play. In this blog post, we’ll explore what HEWJ is, as well as its pros, cons, and investment strategies.

What is HEWJ?

HEWJ stands for the iShares Currency Hedged MSCI Japan ETF. It is designed to provide exposure to Japanese equities while mitigating the effects of fluctuations between the U.S. dollar and the Japanese yen. This can be particularly advantageous for investors who wish to invest in Japan but are concerned about currency volatility.

Key Features of HEWJ

• Currency Hedging: The primary feature of HEWJ is its hedge against currency risk, which protects against fluctuations between the U.S. dollar and the Japanese yen.
• MSCI Japan Index: HEWJ tracks the MSCI Japan 100% Hedged to USD Index, which includes large and mid-cap segments of the Japanese market.
• Diversification: By investing in HEWJ, investors get exposure to a broad array of Japanese companies across various sectors, including technology, consumer goods, and healthcare.

HEWJ Composition

HEWJ comprises a diversified portfolio of prominent Japanese companies, reflecting the sectors that drive Japan's economy. Some of the major holdings typically include companies like Toyota, Sony, and Mitsubishi UFJ Financial Group. The ETF’s focus is on large and mid-cap companies that are leaders in their respective industries.

Pros of HEWJ

Currency Risk Mitigation

One of the main advantages of HEWJ is its ability to hedge against currency risk. Currency fluctuations can significantly impact the returns of an international investment, and HEWJ's design aims to stabilize these returns by neutralizing the effects of USD/JPY exchange rate changes.

Exposure to Japanese Market

Japan's economy is well-known for its robust technology and automotive sectors. Investing in HEWJ allows investors to tap into the growth potential of these sectors without needing to worry as much about currency volatility.

Diversified Portfolio

HEWJ offers a diversified investment by holding a wide array of stocks across different sectors in Japan. This helps spread risk and provides exposure to various parts of the Japanese economy.

Cons of HEWJ

Higher Expense Ratio

Hedged ETFs tend to have higher expense ratios compared to non-hedged counterparts due to the additional cost of implementing the hedging strategy. For HEWJ, the expense ratio is generally higher than that of ETFs that track the MSCI Japan Index without currency hedging.

Limited Benefit in Currency Strengthening Scenarios

If the Japanese yen strengthens significantly against the U.S. dollar, non-hedged investments would benefit from this appreciation. However, because HEWJ is currency-hedged, it would not capture these potential gains, which could be a downside if the yen strengthens considerably.

Less Focus on Dividend Yield

Unlike some ETFs that target high dividend yields, HEWJ primarily focuses on mitigating currency risk and providing capital appreciation. As a result, income-seeking investors may find its dividend yield less attractive.

HEWJ Investment Strategies

HEWJ can be a valuable addition to an investible portfolio, especially for those looking to diversify internationally while managing currency risk.

Long-term Investment Strategy

For long-term investors, HEWJ offers stable and consistent exposure to the Japanese market without the distraction of currency fluctuations. This is particularly important for investors who believe in the long-term growth potential of Japan but wish to avoid the complexities of currency risk.

Balanced Portfolio Diversification

HEWJ can serve as a diversification tool within a balanced portfolio. By adding a currency-hedged international equity component, investors can achieve broader geographical diversification while maintaining some level of stability in returns due to hedged currency risk.

Tactical Allocation

More experienced investors might use HEWJ for tactical allocation, aiming to capitalize on periods of volatility in the Japanese yen. When the yen is expected to weaken against the U.S. dollar, HEWJ can provide exposure to Japanese equities without the downside of currency depreciation.

Periodic Rebalancing

Given that currency dynamics can change, periodically rebalancing the portfolio to adjust the allocation to HEWJ can be beneficial. Monitoring economic indicators and currency trends will help investors make informed decisions about when to increase or decrease their exposure to HEWJ.

In summary, HEWJ offers a compelling solution for investors looking to gain exposure to the Japanese market while mitigating currency risk. While it comes with higher expenses and a lower focus on dividends, its advantages in providing stable, currency-hedged international exposure make it a valuable tool in many investment strategies.