Resurgence in Japan ETFs: Market Bounces Back Amid Active Stock-Picking

Following a recent downturn triggered by a Bank of Japan interest rate hike, Japan's market benchmarks have rebounded. Actively managed ETFs are capitalizing on this by selectively investing in undervalued companies. Experts highlight that Japan's unique market conditions make it suitable for active stock-picking strategies, despite higher fees compared to index-based funds.

Less than a month after a Bank of Japan interest rate hike triggered the biggest selloff since 1987 of the bellwether Nikkei 225 Index, major market benchmarks have bounced back from their lows, although they have yet to recover to the levels recorded in late July.

This rebound is promising news for some actively managed exchange-traded funds (ETFs), market analysts noted. While index-based products still dominate the Japan-focused ETF landscape, newer, smaller actively managed ETFs have leveraged the selloff to selectively purchase stocks at a discount, aiming for long-term outperformance.

'We think taking an active approach to investing in Japan works best,' said Shuntaro Takeuchi, manager of the Matthews Japan Active ETF. The year-old fund with $3.8 million in assets has returned 21.7% so far this year, outperforming its larger peers and the Nikkei 225.

Japan offers fertile ground for active stock picking due to the non-dominance of major stocks in indexes, unlike in the Standard & Poor's 500 index, said Takeuchi. This provides opportunities in sectors like factory automation, construction, technology, and retail.

Rayliant Global Advisors, in partnership with Sumitomo-Mitsui DS Asset Management, launched the Rayliant SMDAM Japan Equity ETF in April, also adopting an actively managed strategy. In four months, the fund gained about 6%, capitalizing on the large number of under-analyzed stocks in Japan.

Experts agree that a stronger yen and improved consumer sentiment could further enhance returns on Japanese stocks. J.P. Morgan's Daiki Hayashi noted a shift in focus towards individual stocks over market indexes, a typical trend in prolonged bull markets.

However, actively managed ETFs do come with higher fees compared to their index-based counterparts. Despite this, WisdomTree Investments continues to focus on index-based ETFs with custom quantitative benchmarks to balance value and customization.

Recent currency volatility has introduced short-term uncertainty, but market experts like Jeremy Schwartz of WisdomTree Investments believe the opportunities for growth remain robust in the long term.