Industry Updates

Product Focus: WisdomTree Japan SmallCap Dividend

Scott Longley

The new WisdomTree Japan SmallCap Dividend UCITS ETF taps into the Japanese domestic economy while offering exposure to the size and value factors, which the company says have been the clear winners from a factor perspective in Japan in the past decade. The WisdomTree Japan SmallCap Dividend UCITS ETF will track the performance of the WisdomTree Japan SmallCap Dividend Index and has a net expense ratio of 0.48%.

What constitutes the index?

Companies must be listed on the Tokyo Stock Exchange and have paid at least $5m in gross cash dividend on shares of the common stocks in the prior annual cycle to annual reconstitution and they must have a market capitalization of at least $100m on screening date. From this universe, the 300 largest companies by market capitalization are removed to create the index. Weighting is on the basis of cash dividends paid. There is a cap of 2% to any single constituent and a cap of 25% to any single sector. WisdomTree's process is also sensitive to the liquidity of underlying constituents, ensuring that constituents with larger weights have greater liquidity to support those bigger exposures.

What is the index's track record?

The index has a live track record of more than 10 years, through which it has outperformed its small-cap benchmark by 1.7% per annum and its large-cap benchmark by 3.4% per annum while maintaining low correlations with European and US markets, true to its domestic focus.

What about Japanese exposure to trade issue and tariffs?

Despite fears at the prospect of a global trade war, WisdomTree says there are segments of the equity market that tend to be less affected by the current issues. The investment case for Japanese small-cap companies lies in the fact that they are more locally oriented and provide greater exposure to the local economy's endogenously driven growth cycle, and with strengthening domestic demand, the index's constituents derive more than 80% of their weighted average revenue inside Japan compared with 57% for Japanese large-caps.

What does the company say are the benefits of the fund?

"We think Japanese small-caps provide the purest way to tap into the local economic growth prospects," says Christopher Gannatti, WisdomTree Head of Research. "After decades of deflation, deleveraging and demand contraction, Japan's domestic demand is now driving growth. A structural shortage of labour is forcing improvements in both the quality of employment and the incomes earned from employment and the government are delivering on a policy switch to 'fiscal dominance' and Japanese small-caps have performed strongly across multiple time horizons in the past ten years, offering differentiation relative to large-caps alone. With the Yen searching for a firm direction over the past few years, many investors have been uncertain as to the best way to invest in Japanese equities. If investors want to try to side-step the Yen's movements and benefit from growth within Japan, small-caps can offer a potential, domestically-focused opportunity."

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