Japan's Investment Landscape: The discussion highlights Japan's evolving investment landscape, focusing on the potential resurgence of the Japanese market under new leadership and the historical context of Japan's economic policies.
DXJ ETF Performance: The WisdomTree Japan Hedged Equity Fund (DXJ) is examined, with insights into its past performance, current positioning, and potential future under the new Japanese prime minister, Sai Takishi.
Currency Hedging Strategy: The podcast delves into the complexities of currency hedging, emphasizing the benefits of hedging against the yen's volatility and the strategic advantages it offers to international investors.
Japan's Economic Challenges: Key challenges such as Japan's high debt-to-GDP ratio, aging population, and the need for economic reforms are discussed, alongside potential growth opportunities in global exports and technology sectors.
Warren Buffett's Influence: Warren Buffett's investment in Japanese companies is highlighted as a significant endorsement, with a focus on the Japan Opportunities Fund that includes Buffett's favored stocks.
Global Economic Context: The podcast touches on global economic dynamics, including the impact of U.S. monetary policy, currency fluctuations, and geopolitical tensions, particularly with China.
Investment Opportunities: New investment products like the Asia Defense Fund and capital-efficient gold funds are discussed as innovative strategies to capitalize on current market conditions.
Market Valuation Insights: Japan's market is described as undervalued compared to the U.S., presenting a potential opportunity for investors seeking value outside the U.S. tech-dominated markets.
Transcript
Welcome to Trillions. I'm Joel Weber. >> And I'm Eric Valunis. >> Eric, there's a country that is actually like big in ETFs and we we actually don't really talk about it enough, but you're heading to Asia on a trip. And then all of a sudden, we started talking about Japan and I was like, well, you know what? we should actually do a Japan episode. And to do that, we're going to have Jeremy Schwarz, who's the global chief investment officer at Wisdom Tree, joining us. What are we going to talk to him about, Eric? >> Yeah. Well, we beyond those reasons, there's also a new prime minister there who by all accounts is very like Abbe and Abbe Nomics was a whole thing from about 10 years ago where this guy just cut he did a lot of you know currency manipulation in order to jack up exports and that created what what was called the fee wars for a couple years there and DXJ which is the Wisdom Tree Japan hedge ETF was like a total rock star. In fact, remember the trivia episode we did? One of the trivia questions was what was the last ETF that wasn't Vanguard or Eyesshares to win the annual Flow Crown? And the answer is DXJ in 2013. It took in 9 billion, but then it started to underperform the non-hedged. A lot of people left. It was like a rise and then a fall. Then it actually had a good run again, but people didn't really come back like they did. It was like it didn't get a second bite at the apple, which we've seen on occasion. But with this leader in here, maybe it will get a third bite at the apple. Maybe this time it will work. I can already see some of the assets growing in it, but it's still uh, you know, basically a shell of what it was 10 years ago. But the design of DXJ should be perfectly fit for this prime minister if what I'm reading is true. >> That prime minister is Sai Takishi, the first female prime minister in Japan's history. Her nickname is a throwback to Margaret Thatcher, the Iron Lady. And joining us is Jeremy Schwarz of Wisdom Tree. This time on Trillians, is Japan back. Jeremy, welcome back to Trillions. >> Thanks so much for having me. One of my favorite topics to talk about with Eric from first episode of ETF IQ to back Japan might be coming back. >> Oh yeah. >> So Jeremy, we did we did a check. you were on in April of 2022. Uh it's been a been a second. So excited to have you back. So ju let's hear you answer the question. Is Japan back? I'm going to guess you're going to say the affirmative. >> Well, the thing is that Japan never left. I mean the thing is people might have traded it wrong but you know if I look at the performance of DXJ compared to the S&P 500 since 2012 um how many international funds can you say have beaten the S&P 500 since 2012? Epha by the way Msei EA the broad international benchmark that everybody buys for international has returned like 7% a year. The S&P's done 15% a year. Okay. And so seven versus 15 for 13 years by the way compounds to like 150% versus 500%. So this is how much international has beaten. What has beaten the S&P since that time DXJ so it's like did now there's a period where it wasn't but as of today that's you know and we're recording early October that is true. Um and so there's been I think you know this comes back to a fundamental problem through international. I mean Eric this is something I've talked about for a long time. Pe this is somewhat a branding problem but you know it also just a sequencing problem that people think hedging is this exotic thing when like betting on currencies is actually a much more interesting more exotic thing. Like why do you want to go long the yen? You know if you had to say default should you be long the yen or should you just be neutral the yen? most people would have been neutral, but they default to being long VN all the time. It's kind of a crazy thing, but I'd say DXJ never left, but people left and uh they made a mistake. >> So, what's interesting about that timeline that you lay out is just how much is actually changed in Japan. You know, this huge monetary policy experiment, it was ne they had like negative interest rates forever. Year and change ago, they they left that and like re-entered sort of the normaly. Now there's inflation and even Japanese are starting to have to invest differently because they can't just keep cash under the mattress anymore. So is this is DXJ's success is it really like the the international investment opportunity or or is there a domestic story there too? >> Yeah, I people do ask that question about um if if it's also one of the oldest populations so a declining population. So like when when we talk about it is it really about the local Japan story or just their global you know sort of footprint. Um I have said that it's not about just the local economy that it's Japan is generally like a global growth play that it sort of exports all around the world. They have some of the you know they're they're the infrastructure some of their their semiconductors can find their way. Soft bank is like an AI play. Tokyo Electron feeds into a lot of the other global AI stories you know. So they are components. They don't have like a I'd say the Mag 7 like we have these tech leaders, but they have things that that support a lot of that. You know, I'd say the other person who's brought the most interest to Japan has been Buffett. So like you think about world's premier best value investors. Five years ago, I was telling people follow Buffett in Japan. I probably done six or seven different pieces. Follow Buffett into Japan. And in fact, I actually then created a fund to buy half the stocks, you know, half of its weight basically is in the Buffett stocks. Um, so OPJ, OPBJ, Japan opportunities, we took a smaller fund to do that. Um, we had a small cap fund. That's the more local that was the more local story. I just said, you know, people don't care much enough about the small caps. As much as I cared, people didn't care. But the Japan opportunity story with Buffett tagging along actually is is is just as interesting today. Actually, >> um, when we look at the year-to- date returns, it's pretty close. So, the non-hedged is up 18%. DXJ is up about the same and the S&P is up 13%. Now, the dollar has been weakening, and usually if the dollar's weakening, it's not good for currency hedged international ETFs, right? You want the dollar strengthening and Japan's currency getting weaker. That's the perfect trade for DXJ. Is this prime minister going to do what Abbe did and like really purposely make the currency worth less in order to jack up exports and how much is left in that trade? Because when I just went back and looked at five-year DXJ is destroying the non-hedged. So I guess that would be my two questions as somebody thinking about going in now. >> Yeah, it's a very tricky question. these currencies can be very unpredictable which goes back to like do you really want to bet on the yen going up you know which it's a it's a high bar to say like do I really want to bet on the yen um you know with DXJ you're basically getting today you're getting call it three and a half to 4% on top of the local market or this is an important distinction because when you hedge you get the interest rate differentials on top of the local market return like you hear about the yen carry trade you hear about these carry trad rates when you're hedging, you're paid the interest rate differentials between the local, you know, between the US and local market. So, yes, the Fed's bring rates down. Japan's been hiking a little bit for a little while. We're getting five to six% carry on top of the local market return, which is again is how much the yen has to go up to break even with the hedge, right? So, they're starting out 4% behind the eightball is is how much the unhedged has to go up. Now, the end had the dollar had been getting weak. A lot of people are think the dollar had peaked out and things go. So it it's not just in Japan's control. I mean for sure when AB came in you had 80 yen to the dollar. Today we're over 150 yen to the dollar. So it's a definitely a very different starting point. It was a very overly strong yen when a came in. You wouldn't say it's an overly strong yen today. Um but it sort of comes back to the policies. like if she's trying to get them to delay raising rates, if they do a lot more fiscal spending, they've got some of the highest debts to GDP, you know, there's just the questions. It's like what, you know, now she might be progrowth and that might be good for the currency, but it's it's sort of an it's it's unpredictable. So, it's like is that your thesis? The thesis is she's good for the equities. she might not be good for the currency. Or at least it adds extra noise and extra volatility when you know you could buy the stocks and get paid you know over 3% today to hedging. One thing you mentioned was the debt to GDP. As Joel knows, I've been deep in this Bitcoin book and one of the things that you have to cover when you're covering this is deficit, debt, inflation, and I think the US is is like 130%. I have to double check that, but I believe Japan's double 250%. They're basically like the highest in the world for a big country. That seems crazy to me, but as some people pointed out, that doesn't necessarily mean you're going to get a lot of inflation. Um, and Japan is also, you know, there's a famous like kind of meme on on social media where somebody starts talking about US stocks and somebody comes in now do Japan and it's usually looking at like the lost decade of Japan like which was a couple decades ago about how a stock market can just do nothing. So I guess with I don't know as an investor and I'm thinking like hey this is a debtridden country. I don't hear a lot of things about mag seven type stocks there. Um, what am I really buying here? Is it just a trade on on on monetary policy? Um, and and how much more monetary policy can be uh dovish or loose given they're already at that debt to GDP level? My friends at Allstar Charts, JC Perez, Steve Strazza, do these like 30-year breakout charts on Japan. Like, you know, like they has been building this base for 30 years and you just got like the Nikk break out at 48,000 and it's, you know, 1989 was the peak. It's just catching up to the 1989 peak, but it was like one of the greatest bubbles of all time. Like international stocks were like 60% Japan in 1989. It was one of the most expensive markets. You thought the tech bubble in 2000 was expensive. More of Japan was more expensive than tech bubble of 2000, right? That's how big it was. Now it's the inverse today. If I look at that, you know, I've got two different Japan funds, but let's just stay with DXJ, the flagship 14 12 PE when the S&P is 23 PE. Okay, so S&P is selling at a 4 to 5% earnings yield. We've got a two and a half% equity premium, let's call it. You know, like we look at the earnings yield versus a tips yield. So, you know, it'll take you over 40 years to double your money in bonds today in purchasing power terms. Under 2% tips yield, stocks might take you 14 to 15 years in the US at a 5% earnings yield. Japan at a 14 PE is like an 8 7 to 8% earnings yield. It's more like a 8 to nyear doubling of your purchasing power. It's a much better value than it's like the I call it the inverse bubble. Like people just have lack of apathy. You know, there's not any interest. International has been out of favor for this 15 20 years at the US MAG 7 been in favor and so nobody cares. And so the valuations support that. the the Japan Opportunities Fund which has all those Buffett stocks is at 12 and a half PE 8% earnings yield very high quality stocks doing a ton of buybacks growing the dividends I mean it's such a good value story in my opinion and if you get any positive catalyst that Ta these Takayi trades if she is you know there's there's questions on how effective she's going to be she's got to get her coalition together but if she is productive in lowering taxes you talk about doing a 10% % consumption like bringing a flatter tax to 10% to try to restimulate demand. Um that could be a very very big deal and it's a cheap market. So you know I I I obviously I like the market. >> How big are these challenges that that she faces just to kind of lay out the the landscape? It's >> tough, man. I mean it is it's a tough set of politics. She's got to figure out who's going to to go with her, how how she brings it. They do have these inflation problems. People are are somewhat Eric when you talk about the currency before versus AB, you know, the yen was way too strong before. Now people are worried that their yen aren't going as far and there's inflation and so the the weak yen makes it a hamstring. One of our former strategists said she needs to go for a strong yen policy. So there's there's questions. Um but that is one of the things she's got to confront. Um but she's definitely being trying to bring a progrowth mindset. the battle like I call it Eric we launched an Asia defense fund and and uh Eric was giving me a hard time in the name of like well is it why you know is there China in that Asia defense fund and I said well no no this is with the battle for China and Joel I told him they they they need to run with that and call it I forget the name we came up with defending ourselves from China Asia defense ETF versus just like Asia defense I'm like you should own the fact that it's a specific situation there. >> I don't know if Jeremy wants to comment on that. >> I mean, it is the battle with China fund in some ways. I mean, we called it Asia Defense. I thought it was implied that it was for the battle for China, but yes, I understand his point like is it with China or for the battle, but that is very topical, too. uh in Takayichi, one of the Takayuchi trades. I wrote a piece that the Takahuchi trades and one of the trades is a defense positioning like she is very strong against China and she thinks they if there were to be a conflict with Taiwan um she wants to defend Taiwan uh and she wants to increase spending and so she you know now if you think back to the US politics in the geopolitics there is you know Trump is negotiating hard with China maybe by the time people hear this they've negotiated some grand bargain, but it's it's hot. You know, the China US has been one of the big hot topics this year. Um, Abbe was one of Trump's close allies, and then you had sort of the a fledgling of prime ministers that weren't, you know, doing as well with Trump. The the idea was Takayuchi might be a better negotiator with Trump on some of these issues, more friendly with with Trump because she is kind of viewed as this a 2.0 in some ways, but the defense story is one of the big stories. And and so I think you know the European Defense was one of the hot ETFs this year like we somehow in in our European team launched a European defense fund like the week Zalinski was in the White House and that that fund just took off like like you would expect. But we actually think this Asia defense today is the hot spot actually for where things could go over the next few years. And Taiishi is very supportive for Asian defense. As long as we're talking about China and Trump and Japan sort of in the middle, but maybe leaning a little bit more towards Trump, I I just want to go back to trade, which is obviously been the backdrop for so much of what we've been talking about all year. Um, Japan very much an export economy. I'm curious specifically about the automotive industry and and sort of the your exposure to it and and how it's going to try and navigate what's to come and how that might impact uh your investments. >> Yeah, that that is why I've been highlighting this this second fund I have this Japan Opportunities Fund because it's much more in the industrials, the the five Buffett stocks than just betting on the car companies. Now I'm not saying that DXJ is just the car companies but in terms of the sectors it you know DXJ you know 14 have PE it has it's going to have more exposure to like Toyota which is its second largest holding or Honda which is in the top 10 you know so it's going to have 25% uh maybe closer to 20% in consumer discretionaries industrial still a big sector there 25% so it's more tied to that the autos is been a sector you know that China's rise has been competing with like my my colleague Sam was just in Mexico coming off of a Mexico trip >> by everywhere >> everywhere like everything is all China cars and and Elon had said you know nine of the 10 largest cars are going to be Chinese and you know because of the competition that they are so strong it's global competitive I that the car industry has been under pressure everywhere and and so that is China a big China competitive dynamic I got an ETF nerd question for you here a little bit. DXJ, again, when I wrote my first book, the ETF Toolbox, it was like DXJ had taken over the industry. So, I have a whole chapter called currency hedging, which isn't that big of a deal anymore. Like, but at the time, that's how big it was. I made a whole chapter for it. And I just thought you guys really set the the bar for how to market an ETF. I call it speedboat marketing. Instead of acting like an aircraft carrier, if you have one of these ETFs that gets hot, you drop everything and you rally around this one product. They had ads, Joel, on Bloomberg TV and elsewhere. Take the yen out of Japan. I mean, that is good, right? Jeremy was everywhere. And Deutsche Bank had a competing product that had actually launched earlier, but DXJ got all the money. Now DXJ then saw some outflows since and it's had great performance, but it hasn't able to kind of get back to that peak. What do you make of that? We on a team have this phrase called like it's hard to get a second bite at the apple. If you look at high flyers in history past, especially active managers, these shooting star types like the Janice 20, it's just hard to to come back. Even if you come back performance-wise, it's hard to come back in a sort of zeitgeist way. How do you get DXJ back on people's radars given that they might have been like, "Well, I did that ride already and it was a little dizzying and I I'm not doing that again." >> Yeah, it's very interesting. I I'll say I probably talked more currency hedging than anybody in the industry for the last uh 15 years. I did my first one in '09. I think I was the first ETF actually and it the first one was broad EPHA and now interestingly in the in the history folklorj which became Europe was the first one we we converted it's fascinating I remember talking with a market maker we had a client who wanted to buy it and the market maker didn't want to make this is we're talking 2009 2010 and they didn't want to quote all the spreads because the you had to put on these hedges and it was too wide of a thing and the broad EA just didn't take off. And then it was April of 2010, we had DXJ unhedged from '06. April 2010, I added the hedge. We we added the hedge to the yen. And then it took off during the earthquake in 2011. So the yen really went up and people were starting to say, "Oh, this was a it may be going up too much." And so it started to work for the yen. So it probably took about 500 million in 2011 time frame after the earthquake. and we saw that it was working for a single currency with Japan and then we made hedge the European one which we should have just launched a broad EA one versus converting but you know who know you going back in time but then then both of those took off you know as you said Eric like the single currencies did take off the broad Ephas took off we've started doing a little bit below the radar now some more active hedging like we have a multifactor family that's actively hedging we have a dynamic family probably our big our our fund that's raising the most in the international markets this year has been a dynamic fund that does it just as part of the factors. So it does seem scary some again it comes back to branding like people think dynamic currency hedge oh it's some scary thing but dynamic international the branding I think is a bit better in multifactors which is one of the factors and so we're trying to win the longer game but you know for sure it reduces volatility taking the current taking out this noisy thing currency moves 78% a year do you really want that volatility I think most people wouldn't accept that volatility it comes back to benchmarking questions All right, Aqua have the currency. So, they feel like they're going to make an active call to hedge, but really the active call is to bet on the currency. It's like, really? You want to bet on the euro? Really? You have a long-term strong being the euro? >> Th this is the challenge with currency hedging. You have to actually change the the way your mind works. You have to see almost the way I would describe it, Jeremy. I would say this lets you invest as if you're a person in Japan investing in the stock market. >> Exactly. It takes out the other this other element. So when you buy EWJ, you're actually buying two things. And I I hear you because I remember I used to say this was an A minus B ETF and you're like, no, it's just A. The other one A plus B. Yeah. And I you you got me. It took a while. Some of this stuff takes a couple years. But I also think you guys did a great job of diversifying away. you've got you had like this huge hit song, but instead of just like relying on this one like your next couple products over the next decade, um you've got some huge hits that really diversified the product line. DXJ is still up there for you, but like you've got uh USFR and DGRW both 1716 billion. We've written about that a couple times, but um anyway, it's just interesting. Wisdom Tree has always been like an interesting case study, pure ETF company, publicly traded ETF company, and you know, how to like survive after, you know, your big hit and not make sure you're not just living off of that, which I think is a a good lesson for all the issuers out there. >> Well, just as we as we come to the end here, Jeremy, like what what's next? >> Well, in some ways, it's interesting, Eric, you talked about the A plusB ETFs and A minus B's ETFs. The one that's gaining a lot of traction now that should be so much bigger. You know that we if you said go back to the TV the TV days you know what we have on TV right now is our gold stack. You know our sort of capital efficient gold funds where you put gold on top of things as gold up 50% year to date. We have an basically US equities plus gold futures on top of it GDE. And then we have GDMN which is miners plus gold that competes with that. Those are now you know the the miners have taken about 150 million this year. the gold overlay to the S&P kind of stocks to our own basket of 500 stocks, but GDE is 500. >> EDMN is up 180% >> top performing compared to your standard miners. >> That's efficient gold plus miners. So that's gold miners. Is that like leverage at 150 or something? >> Well, it's it's 9090. So 90% the stocks, 90% the futures. So it's a >> you know, it's adding the gold futures on top. And we did the same thing with core stock. So if you go back to your deficit problems, the debt and deficits, you know, people are worried about the dollar. You don't have to go to international to do that. Just add gold on top of your US large tax with GDE. So that's our that's that is really a plus b. This is, you know, this is a good a good family. >> By the way, Joel, they got a China xstateowned enterprises. And so that I told them that should be take the communism out of China, but they didn't run with that. I said that's on the house. >> It's pretty good, isn't it? >> Bring it back up. >> Then they have one for EM that's exstate owned EM companies. And I said probably can't I'd say take the socialism out of the emerging markets. >> I'm going to go back with that. I'm going to bring that back to the marketing team after we get off this call here. >> All right. Well, you clearly have a way of uh surfing some interesting situations. Uh so Jeremy, thanks for coming back on Trillions and looking forward to having you back again soon. >> Always so much fun with you guys. Thanks for listening to Trillions. Until next time, you can find us on the Bloomberg terminal, bloomberg.com, Apple Podcast, Spotify, or wherever else you like to listen. We'd love to hear from you. Hit us up on social. I'm Joel Weber Show. He's Ericbinas. Trillions is produced by Magnus Hendrickson. Sage Bowman is the head of Bloomberg Podcast.
Is Japan Back? | Trillions
Summary
Transcript
Welcome to Trillions. I'm Joel Weber. >> And I'm Eric Valunis. >> Eric, there's a country that is actually like big in ETFs and we we actually don't really talk about it enough, but you're heading to Asia on a trip. And then all of a sudden, we started talking about Japan and I was like, well, you know what? we should actually do a Japan episode. And to do that, we're going to have Jeremy Schwarz, who's the global chief investment officer at Wisdom Tree, joining us. What are we going to talk to him about, Eric? >> Yeah. Well, we beyond those reasons, there's also a new prime minister there who by all accounts is very like Abbe and Abbe Nomics was a whole thing from about 10 years ago where this guy just cut he did a lot of you know currency manipulation in order to jack up exports and that created what what was called the fee wars for a couple years there and DXJ which is the Wisdom Tree Japan hedge ETF was like a total rock star. In fact, remember the trivia episode we did? One of the trivia questions was what was the last ETF that wasn't Vanguard or Eyesshares to win the annual Flow Crown? And the answer is DXJ in 2013. It took in 9 billion, but then it started to underperform the non-hedged. A lot of people left. It was like a rise and then a fall. Then it actually had a good run again, but people didn't really come back like they did. It was like it didn't get a second bite at the apple, which we've seen on occasion. But with this leader in here, maybe it will get a third bite at the apple. Maybe this time it will work. I can already see some of the assets growing in it, but it's still uh, you know, basically a shell of what it was 10 years ago. But the design of DXJ should be perfectly fit for this prime minister if what I'm reading is true. >> That prime minister is Sai Takishi, the first female prime minister in Japan's history. Her nickname is a throwback to Margaret Thatcher, the Iron Lady. And joining us is Jeremy Schwarz of Wisdom Tree. This time on Trillians, is Japan back. Jeremy, welcome back to Trillions. >> Thanks so much for having me. One of my favorite topics to talk about with Eric from first episode of ETF IQ to back Japan might be coming back. >> Oh yeah. >> So Jeremy, we did we did a check. you were on in April of 2022. Uh it's been a been a second. So excited to have you back. So ju let's hear you answer the question. Is Japan back? I'm going to guess you're going to say the affirmative. >> Well, the thing is that Japan never left. I mean the thing is people might have traded it wrong but you know if I look at the performance of DXJ compared to the S&P 500 since 2012 um how many international funds can you say have beaten the S&P 500 since 2012? Epha by the way Msei EA the broad international benchmark that everybody buys for international has returned like 7% a year. The S&P's done 15% a year. Okay. And so seven versus 15 for 13 years by the way compounds to like 150% versus 500%. So this is how much international has beaten. What has beaten the S&P since that time DXJ so it's like did now there's a period where it wasn't but as of today that's you know and we're recording early October that is true. Um and so there's been I think you know this comes back to a fundamental problem through international. I mean Eric this is something I've talked about for a long time. Pe this is somewhat a branding problem but you know it also just a sequencing problem that people think hedging is this exotic thing when like betting on currencies is actually a much more interesting more exotic thing. Like why do you want to go long the yen? You know if you had to say default should you be long the yen or should you just be neutral the yen? most people would have been neutral, but they default to being long VN all the time. It's kind of a crazy thing, but I'd say DXJ never left, but people left and uh they made a mistake. >> So, what's interesting about that timeline that you lay out is just how much is actually changed in Japan. You know, this huge monetary policy experiment, it was ne they had like negative interest rates forever. Year and change ago, they they left that and like re-entered sort of the normaly. Now there's inflation and even Japanese are starting to have to invest differently because they can't just keep cash under the mattress anymore. So is this is DXJ's success is it really like the the international investment opportunity or or is there a domestic story there too? >> Yeah, I people do ask that question about um if if it's also one of the oldest populations so a declining population. So like when when we talk about it is it really about the local Japan story or just their global you know sort of footprint. Um I have said that it's not about just the local economy that it's Japan is generally like a global growth play that it sort of exports all around the world. They have some of the you know they're they're the infrastructure some of their their semiconductors can find their way. Soft bank is like an AI play. Tokyo Electron feeds into a lot of the other global AI stories you know. So they are components. They don't have like a I'd say the Mag 7 like we have these tech leaders, but they have things that that support a lot of that. You know, I'd say the other person who's brought the most interest to Japan has been Buffett. So like you think about world's premier best value investors. Five years ago, I was telling people follow Buffett in Japan. I probably done six or seven different pieces. Follow Buffett into Japan. And in fact, I actually then created a fund to buy half the stocks, you know, half of its weight basically is in the Buffett stocks. Um, so OPJ, OPBJ, Japan opportunities, we took a smaller fund to do that. Um, we had a small cap fund. That's the more local that was the more local story. I just said, you know, people don't care much enough about the small caps. As much as I cared, people didn't care. But the Japan opportunity story with Buffett tagging along actually is is is just as interesting today. Actually, >> um, when we look at the year-to- date returns, it's pretty close. So, the non-hedged is up 18%. DXJ is up about the same and the S&P is up 13%. Now, the dollar has been weakening, and usually if the dollar's weakening, it's not good for currency hedged international ETFs, right? You want the dollar strengthening and Japan's currency getting weaker. That's the perfect trade for DXJ. Is this prime minister going to do what Abbe did and like really purposely make the currency worth less in order to jack up exports and how much is left in that trade? Because when I just went back and looked at five-year DXJ is destroying the non-hedged. So I guess that would be my two questions as somebody thinking about going in now. >> Yeah, it's a very tricky question. these currencies can be very unpredictable which goes back to like do you really want to bet on the yen going up you know which it's a it's a high bar to say like do I really want to bet on the yen um you know with DXJ you're basically getting today you're getting call it three and a half to 4% on top of the local market or this is an important distinction because when you hedge you get the interest rate differentials on top of the local market return like you hear about the yen carry trade you hear about these carry trad rates when you're hedging, you're paid the interest rate differentials between the local, you know, between the US and local market. So, yes, the Fed's bring rates down. Japan's been hiking a little bit for a little while. We're getting five to six% carry on top of the local market return, which is again is how much the yen has to go up to break even with the hedge, right? So, they're starting out 4% behind the eightball is is how much the unhedged has to go up. Now, the end had the dollar had been getting weak. A lot of people are think the dollar had peaked out and things go. So it it's not just in Japan's control. I mean for sure when AB came in you had 80 yen to the dollar. Today we're over 150 yen to the dollar. So it's a definitely a very different starting point. It was a very overly strong yen when a came in. You wouldn't say it's an overly strong yen today. Um but it sort of comes back to the policies. like if she's trying to get them to delay raising rates, if they do a lot more fiscal spending, they've got some of the highest debts to GDP, you know, there's just the questions. It's like what, you know, now she might be progrowth and that might be good for the currency, but it's it's sort of an it's it's unpredictable. So, it's like is that your thesis? The thesis is she's good for the equities. she might not be good for the currency. Or at least it adds extra noise and extra volatility when you know you could buy the stocks and get paid you know over 3% today to hedging. One thing you mentioned was the debt to GDP. As Joel knows, I've been deep in this Bitcoin book and one of the things that you have to cover when you're covering this is deficit, debt, inflation, and I think the US is is like 130%. I have to double check that, but I believe Japan's double 250%. They're basically like the highest in the world for a big country. That seems crazy to me, but as some people pointed out, that doesn't necessarily mean you're going to get a lot of inflation. Um, and Japan is also, you know, there's a famous like kind of meme on on social media where somebody starts talking about US stocks and somebody comes in now do Japan and it's usually looking at like the lost decade of Japan like which was a couple decades ago about how a stock market can just do nothing. So I guess with I don't know as an investor and I'm thinking like hey this is a debtridden country. I don't hear a lot of things about mag seven type stocks there. Um, what am I really buying here? Is it just a trade on on on monetary policy? Um, and and how much more monetary policy can be uh dovish or loose given they're already at that debt to GDP level? My friends at Allstar Charts, JC Perez, Steve Strazza, do these like 30-year breakout charts on Japan. Like, you know, like they has been building this base for 30 years and you just got like the Nikk break out at 48,000 and it's, you know, 1989 was the peak. It's just catching up to the 1989 peak, but it was like one of the greatest bubbles of all time. Like international stocks were like 60% Japan in 1989. It was one of the most expensive markets. You thought the tech bubble in 2000 was expensive. More of Japan was more expensive than tech bubble of 2000, right? That's how big it was. Now it's the inverse today. If I look at that, you know, I've got two different Japan funds, but let's just stay with DXJ, the flagship 14 12 PE when the S&P is 23 PE. Okay, so S&P is selling at a 4 to 5% earnings yield. We've got a two and a half% equity premium, let's call it. You know, like we look at the earnings yield versus a tips yield. So, you know, it'll take you over 40 years to double your money in bonds today in purchasing power terms. Under 2% tips yield, stocks might take you 14 to 15 years in the US at a 5% earnings yield. Japan at a 14 PE is like an 8 7 to 8% earnings yield. It's more like a 8 to nyear doubling of your purchasing power. It's a much better value than it's like the I call it the inverse bubble. Like people just have lack of apathy. You know, there's not any interest. International has been out of favor for this 15 20 years at the US MAG 7 been in favor and so nobody cares. And so the valuations support that. the the Japan Opportunities Fund which has all those Buffett stocks is at 12 and a half PE 8% earnings yield very high quality stocks doing a ton of buybacks growing the dividends I mean it's such a good value story in my opinion and if you get any positive catalyst that Ta these Takayi trades if she is you know there's there's questions on how effective she's going to be she's got to get her coalition together but if she is productive in lowering taxes you talk about doing a 10% % consumption like bringing a flatter tax to 10% to try to restimulate demand. Um that could be a very very big deal and it's a cheap market. So you know I I I obviously I like the market. >> How big are these challenges that that she faces just to kind of lay out the the landscape? It's >> tough, man. I mean it is it's a tough set of politics. She's got to figure out who's going to to go with her, how how she brings it. They do have these inflation problems. People are are somewhat Eric when you talk about the currency before versus AB, you know, the yen was way too strong before. Now people are worried that their yen aren't going as far and there's inflation and so the the weak yen makes it a hamstring. One of our former strategists said she needs to go for a strong yen policy. So there's there's questions. Um but that is one of the things she's got to confront. Um but she's definitely being trying to bring a progrowth mindset. the battle like I call it Eric we launched an Asia defense fund and and uh Eric was giving me a hard time in the name of like well is it why you know is there China in that Asia defense fund and I said well no no this is with the battle for China and Joel I told him they they they need to run with that and call it I forget the name we came up with defending ourselves from China Asia defense ETF versus just like Asia defense I'm like you should own the fact that it's a specific situation there. >> I don't know if Jeremy wants to comment on that. >> I mean, it is the battle with China fund in some ways. I mean, we called it Asia Defense. I thought it was implied that it was for the battle for China, but yes, I understand his point like is it with China or for the battle, but that is very topical, too. uh in Takayichi, one of the Takayuchi trades. I wrote a piece that the Takahuchi trades and one of the trades is a defense positioning like she is very strong against China and she thinks they if there were to be a conflict with Taiwan um she wants to defend Taiwan uh and she wants to increase spending and so she you know now if you think back to the US politics in the geopolitics there is you know Trump is negotiating hard with China maybe by the time people hear this they've negotiated some grand bargain, but it's it's hot. You know, the China US has been one of the big hot topics this year. Um, Abbe was one of Trump's close allies, and then you had sort of the a fledgling of prime ministers that weren't, you know, doing as well with Trump. The the idea was Takayuchi might be a better negotiator with Trump on some of these issues, more friendly with with Trump because she is kind of viewed as this a 2.0 in some ways, but the defense story is one of the big stories. And and so I think you know the European Defense was one of the hot ETFs this year like we somehow in in our European team launched a European defense fund like the week Zalinski was in the White House and that that fund just took off like like you would expect. But we actually think this Asia defense today is the hot spot actually for where things could go over the next few years. And Taiishi is very supportive for Asian defense. As long as we're talking about China and Trump and Japan sort of in the middle, but maybe leaning a little bit more towards Trump, I I just want to go back to trade, which is obviously been the backdrop for so much of what we've been talking about all year. Um, Japan very much an export economy. I'm curious specifically about the automotive industry and and sort of the your exposure to it and and how it's going to try and navigate what's to come and how that might impact uh your investments. >> Yeah, that that is why I've been highlighting this this second fund I have this Japan Opportunities Fund because it's much more in the industrials, the the five Buffett stocks than just betting on the car companies. Now I'm not saying that DXJ is just the car companies but in terms of the sectors it you know DXJ you know 14 have PE it has it's going to have more exposure to like Toyota which is its second largest holding or Honda which is in the top 10 you know so it's going to have 25% uh maybe closer to 20% in consumer discretionaries industrial still a big sector there 25% so it's more tied to that the autos is been a sector you know that China's rise has been competing with like my my colleague Sam was just in Mexico coming off of a Mexico trip >> by everywhere >> everywhere like everything is all China cars and and Elon had said you know nine of the 10 largest cars are going to be Chinese and you know because of the competition that they are so strong it's global competitive I that the car industry has been under pressure everywhere and and so that is China a big China competitive dynamic I got an ETF nerd question for you here a little bit. DXJ, again, when I wrote my first book, the ETF Toolbox, it was like DXJ had taken over the industry. So, I have a whole chapter called currency hedging, which isn't that big of a deal anymore. Like, but at the time, that's how big it was. I made a whole chapter for it. And I just thought you guys really set the the bar for how to market an ETF. I call it speedboat marketing. Instead of acting like an aircraft carrier, if you have one of these ETFs that gets hot, you drop everything and you rally around this one product. They had ads, Joel, on Bloomberg TV and elsewhere. Take the yen out of Japan. I mean, that is good, right? Jeremy was everywhere. And Deutsche Bank had a competing product that had actually launched earlier, but DXJ got all the money. Now DXJ then saw some outflows since and it's had great performance, but it hasn't able to kind of get back to that peak. What do you make of that? We on a team have this phrase called like it's hard to get a second bite at the apple. If you look at high flyers in history past, especially active managers, these shooting star types like the Janice 20, it's just hard to to come back. Even if you come back performance-wise, it's hard to come back in a sort of zeitgeist way. How do you get DXJ back on people's radars given that they might have been like, "Well, I did that ride already and it was a little dizzying and I I'm not doing that again." >> Yeah, it's very interesting. I I'll say I probably talked more currency hedging than anybody in the industry for the last uh 15 years. I did my first one in '09. I think I was the first ETF actually and it the first one was broad EPHA and now interestingly in the in the history folklorj which became Europe was the first one we we converted it's fascinating I remember talking with a market maker we had a client who wanted to buy it and the market maker didn't want to make this is we're talking 2009 2010 and they didn't want to quote all the spreads because the you had to put on these hedges and it was too wide of a thing and the broad EA just didn't take off. And then it was April of 2010, we had DXJ unhedged from '06. April 2010, I added the hedge. We we added the hedge to the yen. And then it took off during the earthquake in 2011. So the yen really went up and people were starting to say, "Oh, this was a it may be going up too much." And so it started to work for the yen. So it probably took about 500 million in 2011 time frame after the earthquake. and we saw that it was working for a single currency with Japan and then we made hedge the European one which we should have just launched a broad EA one versus converting but you know who know you going back in time but then then both of those took off you know as you said Eric like the single currencies did take off the broad Ephas took off we've started doing a little bit below the radar now some more active hedging like we have a multifactor family that's actively hedging we have a dynamic family probably our big our our fund that's raising the most in the international markets this year has been a dynamic fund that does it just as part of the factors. So it does seem scary some again it comes back to branding like people think dynamic currency hedge oh it's some scary thing but dynamic international the branding I think is a bit better in multifactors which is one of the factors and so we're trying to win the longer game but you know for sure it reduces volatility taking the current taking out this noisy thing currency moves 78% a year do you really want that volatility I think most people wouldn't accept that volatility it comes back to benchmarking questions All right, Aqua have the currency. So, they feel like they're going to make an active call to hedge, but really the active call is to bet on the currency. It's like, really? You want to bet on the euro? Really? You have a long-term strong being the euro? >> Th this is the challenge with currency hedging. You have to actually change the the way your mind works. You have to see almost the way I would describe it, Jeremy. I would say this lets you invest as if you're a person in Japan investing in the stock market. >> Exactly. It takes out the other this other element. So when you buy EWJ, you're actually buying two things. And I I hear you because I remember I used to say this was an A minus B ETF and you're like, no, it's just A. The other one A plus B. Yeah. And I you you got me. It took a while. Some of this stuff takes a couple years. But I also think you guys did a great job of diversifying away. you've got you had like this huge hit song, but instead of just like relying on this one like your next couple products over the next decade, um you've got some huge hits that really diversified the product line. DXJ is still up there for you, but like you've got uh USFR and DGRW both 1716 billion. We've written about that a couple times, but um anyway, it's just interesting. Wisdom Tree has always been like an interesting case study, pure ETF company, publicly traded ETF company, and you know, how to like survive after, you know, your big hit and not make sure you're not just living off of that, which I think is a a good lesson for all the issuers out there. >> Well, just as we as we come to the end here, Jeremy, like what what's next? >> Well, in some ways, it's interesting, Eric, you talked about the A plusB ETFs and A minus B's ETFs. The one that's gaining a lot of traction now that should be so much bigger. You know that we if you said go back to the TV the TV days you know what we have on TV right now is our gold stack. You know our sort of capital efficient gold funds where you put gold on top of things as gold up 50% year to date. We have an basically US equities plus gold futures on top of it GDE. And then we have GDMN which is miners plus gold that competes with that. Those are now you know the the miners have taken about 150 million this year. the gold overlay to the S&P kind of stocks to our own basket of 500 stocks, but GDE is 500. >> EDMN is up 180% >> top performing compared to your standard miners. >> That's efficient gold plus miners. So that's gold miners. Is that like leverage at 150 or something? >> Well, it's it's 9090. So 90% the stocks, 90% the futures. So it's a >> you know, it's adding the gold futures on top. And we did the same thing with core stock. So if you go back to your deficit problems, the debt and deficits, you know, people are worried about the dollar. You don't have to go to international to do that. Just add gold on top of your US large tax with GDE. So that's our that's that is really a plus b. This is, you know, this is a good a good family. >> By the way, Joel, they got a China xstateowned enterprises. And so that I told them that should be take the communism out of China, but they didn't run with that. I said that's on the house. >> It's pretty good, isn't it? >> Bring it back up. >> Then they have one for EM that's exstate owned EM companies. And I said probably can't I'd say take the socialism out of the emerging markets. >> I'm going to go back with that. I'm going to bring that back to the marketing team after we get off this call here. >> All right. Well, you clearly have a way of uh surfing some interesting situations. Uh so Jeremy, thanks for coming back on Trillions and looking forward to having you back again soon. >> Always so much fun with you guys. Thanks for listening to Trillions. Until next time, you can find us on the Bloomberg terminal, bloomberg.com, Apple Podcast, Spotify, or wherever else you like to listen. We'd love to hear from you. Hit us up on social. I'm Joel Weber Show. He's Ericbinas. Trillions is produced by Magnus Hendrickson. Sage Bowman is the head of Bloomberg Podcast.