ETF Daily: Has Japan Come Too Far Too Fast? (EWJ, JOF, DXJ, EWV, JEQ)

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Our “Daily ETF Watch” begs a question… Have the record inflows of investing capital that have recently into Japan been too much too fast for too volatile of a situation?    TrimTabs Investment Research and others have argued that ETF inflows into Japan were seeing record gains after the earthquake and tsunami caused a nuclear scare hat rattled global equity markets for a week.  TrimTabs this morning updated the figures to show that Japan equity exchange-traded funds saw inflows of about $1.2 billion, which is close to 18% of assets, in the week after the March 11 Japan disaster.  This was the heaviest inflow on record after local shares saw a 16% drop in two sessions.

We looked at Thursday March 10 for the pre-earthquake close on each ETF, looked at the lowest level and the lowest close, and then where shares are back today on each ETF.

iShares MSCI Japan Index (NYSE: EWJ) was at $10.99 before the quake, hit a low of $9.24 with a low close of $9.66, and shares are back up to $10.52 today.

The Japan Smaller Capitalization Fund Inc. (NYSE: JOF) was at $9.21 before the quake, hit a low of $7.68 with a low close of $8.19, and its shares are back up to $9.10 today.

The WisdomTree Japan Hedged Equity (NYSE: DXJ) was at $39.32 before the quake, hit a low of $32.50 with a low close of $33.50, and shares are back up to $36.75.

Meanwhile, there is the inverse-ETF via the ProShares UltraShort MSCI Japan (NYSE: EWV).  Its shares rallied while the market tanked and it has slid way back down.  This inverse-ETF was at $32.98 before the quake, hit a high of $45.34 with a high close of $42.36, and is back down to $34.86 today.

The Japan Equity Fund Inc. (NYSE: JEQ) is a closed-end fund and it was at $6.38 before the quake, hit a low of $5.35 with a low close of $5.58, and its shares are back to $6.20 today.

It turned out that buyers came in almost immediately as bargain hunters saw that the benchmark Topix index plunged to just under 1-times book value.  That was only the second time that has been seen in the past two decades.

Inflows for Japan equity ETFs were about $700 million on March 16 alone and more than doubled the prior record volume day from 2003.  TrimTabs noted, “These funds are on track to take in more than $1.5 billion in March, which would break the previous monthly record of $1.1 billion in November 2005.”

What helped to stabilize the markets was BOJ intervention with nearly $500 billion in market liquidity and it doubled its asset purchase program to $124 billion at the same time that the G-7 intervened against the yen’s appreciation in forex markets.

What is interesting is that TrimTabs tabulated some historical data based on inflows and market performance: when iShares MSCI Japan (NYSE: EWJ) sees monthly inflows of $100 million or more, the benchmark Topix is higher three months later about 66% of the time.

When you see it quantified with book values being so low, it helps in understanding why the snap back rally has been so strong.  Barron’s even did a cover story called “BUY JAPAN NOW”  last weekend.  Add in the notion that all of the financial media and mainstream media allowed the nuclear coverage to morph into nearly being tabloid coverage and you end up with a scenario where the whips become career-makers and career-killers.

JON C. OGG