Smart Japan Investors Are Choosing DXJ Over EWJ and the Returns Prove Why

Japanese equities have delivered some of the strongest returns of any major market over the past year, but USD-based investors who chased that rally without hedging their currency exposure captured far less of it than expected. That gap is exactly the problem WisdomTree Japan Hedged Equity Fund (NYSEARCA:DXJ) was built to close.

What DXJ Actually Does

DXJ gives U.S. investors exposure to Japanese dividend-paying equities while hedging out the yen-dollar exchange rate. The practical effect: you get the return of Japanese stocks priced in yen, converted to dollars at a fixed rate, without the drag of yen fluctuations. The fund holds 433 stocks, with top positions including Mitsubishi UFJ Financial Group and Toyota Motor, and carries a 0.48% expense ratio.

The return engine is twofold. Japanese corporate earnings and dividends are being amplified by an ongoing wave of governance reforms pushing companies to return their historically large cash reserves to shareholders. The hedge itself adds a structural advantage when the yen is weakening: unhedged investors lose purchasing power on their returns, while DXJ holders do not. With USD/JPY trading near 157.76 as of this week, that advantage remains intact.

The Performance Gap Tells the Story

The currency hedge’s impact shows up clearly in the one-year return comparison. DXJ returned 45.92% over the past year while the unhedged iShares MSCI Japan ETF (NYSEARCA:EWJ) returned just 27.41% — despite both funds holding the same underlying Japanese stocks. The gap is almost entirely explained by yen weakness eroding unhedged returns.

The effect compounds dramatically over longer horizons. Over five years, DXJ’s cumulative return of 206.1% dwarfs EWJ’s 40.47%, a divergence that reflects how a persistently weak yen can hollow out gains for investors who left their currency exposure open.

Policy is adding fuel to the equity side. Prime Minister Sanae Takaichi’s economic agenda, which analysts have labeled “Sanaenomics,”, targets AI, semiconductors, energy, and defense spending. Those sectors align directly with DXJ’s industrial and export-oriented holdings. DXJ was up 25.30% year-to-date as of early December 2025, with much of that gain attributed to this policy backdrop.

The Tradeoffs Are Real

The hedge is a two-way commitment. If the yen strengthens, DXJ will underperform EWJ by a comparable margin. That risk materialized in August 2024, when an unexpected Bank of Japan rate hike triggered yen appreciation and investors pulled over $400 million from DXJ in a single week, the largest outflow since 2018. A BOJ policy shift toward tighter rates could flip the currency dynamic entirely.

The fund also carries concentration in export-sensitive industrials and financials, meaning a global demand slowdown hits harder here than in a broadly diversified international fund. The 2.1% dividend yield is modest, so income-seekers should look elsewhere. DXJ has historically performed best during periods when the yen remains weak relative to the dollar, and its returns have been closely tied to that dynamic.