Japan ETFs Show the Dangers of Buying on Disasters

Japan ETFs Show the Dangers of Buying on DisastersDays after the devastating earthquake in Japan, prominent investors such as America's Warren Buffett and Switzerland's Marc Faber pronounced themselves bullish on the country. "Something out of the blue like this, an extraordinary event, really creates a buying opportunity," Buffett said.

An investor stampede followed, with many people putting money into U.S.-based Japan exchange-traded funds. According to market researcher Trimtabs, between March 15 and March 23, nearly $1.7 billion flowed into Japan ETFs. But these investments carry more risks than the average small investor probably realized.

Those ETFs have two strikes against them: The stocks in the fund are priced in yen, but the ETFs themselves are priced in dollars, which means buyers take on a larger than normal currency risk. And because the Tokyo Stock Exchange is closed during U.S. trading hours, the ETFs often sold at a huge premium to the underlying shares -- as high as 9.25%. If that premium gap closed when the Tokyo markets reopened, buyers of the ETF shares could have taken rapid and dramatic loses.

G7 Bankers Put Pressure on Yen

As it turns out, the main Japanese ETF, ishares MSCI Japan Index (EWJ), is down only 3% year-to-date, which is much less than it fell in the immediate aftermath of the quake and tsunami.
For one thing, the yen hit a record high of 76.25 to the dollar on March 17. Nearly $900 million flowed into the Japanese ETFs in the preceding two days on the expectation that companies would sell foreign holdings and bring the proceeds back to Japan to buy yen.

But then, in the first coordinated intervention in a decade, the central banks of the G7 nations took action in the currency markets to force down the value of the yen – an extraordinary move. It now stands about 80.95 to the dollar, a decline of 5.1% in a week.

"I'm sure a lot of people who were doing this trade were unaware that the yen was at the highest level since 1996," says Michael Krause, president of AltaVista Research in New York, which produces the website etfresearchcenter.com. "That was a very strong risk."

Overpaying for a Stock Basket

The other risk was the so-called premium. Most ETFs are basically baskets of stocks designed to track an index. But the stocks in these ETF and their underlying indexes are in Japan, and the U.S. and Japanese markets aren't open at the same time, the share prices of the ETFs in America are moving when the closing prices of the underlying shares in Japan are a day old.

Those situations can create either premiums or discounts: In the case of Japan ETFs, premiums reached a mind-bending high last week, when funds were selling at a large markup above the value of the underlying stocks. Ishares MSCI Japan Index had a premium of 7.87% and WisdomTree Japan SmallCap Dividend Fund (DFJ) carried a 9.25% premium.

"That was extreme -- you're usually not going to have to pay that kind of spread," says Russell Wild, a financial adviser in Alllentown, Pa., who wrote Exchange-Traded Funds for Dummies."When there is a lot of confusion in the markets, such as after an earthquake, and there is a lot of movement in the markets, you risk buying at a premium."

For the small investor, it can be difficult to gauge all the risk involved. (DailyFinance makes it fairly easy to determine the premium on an ETF. On the DailyFinance homepage, enter the ETF ticker symbol followed by .iv into the "search" field, and it will show you the ETF's net asset value.)

Gambling -- and Losing -- on Egypt ETFs

"It's always better to get a broader, more diversified portfolio so that you are not locked into one thing," says Lawrence Carrel, author of ETFs for the Long Run. "The more narrowly focused you are, the more potential there is that anything that happens in that one particular market is going to lose you a significant amount of money."

Krause says that as a rule, regional funds tend to be less volatile than single-country funds because risk is spread over a larger area and number of currencies. But some single-country funds, such as those based on the British markets, have less volatility than emerging market regional funds.

Another example of the inherent risks of ETF investing overseas is illustrated by what happened to the main Egypt ETF, the Market Vectors Egypt Index (EGPT). Some market observers had also called Egypt was a buying opportunity because its shares had been driven down by street demonstrations against President Hosni Mubarak, who eventually agreed to step down.

Trading in the EGPT was brisk in the U.S., and the ETF moved consistently higher even though the stock market in Egypt was closed for more than a month. When the Egyptian Exchange reopened on Tuesday, stocks dropped 10% and EGPT opened at $15.86, a decline of 17% from its March 9 high.

As Wild notes, money committed to these markets often has to be reclassified from an investment to a speculation. It's fine if you have some part of your portfolio set aside to make such wagers, but they aren't something you should risk your savings on.

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GOD BLESS PRESIDENT OBAMA = courage, wisdom, decisiveness ! Obama's handling of the Egyptian crisis and now the Libyan crisis plus Japan proves what a brilliant & great leader he is , respected and admired the world over

See full article from DailyFinance: http://srph.it/ifLCUT

March 27 2011 at 11:09 AM Report abuse -5 rate up rate down Reply

Japan has thier own money , this is no opportunity . don't be stupid . Why is the yen so high even after the earthQuake, Tsunami and Iridiated country ? why is the Govt lying on the death toll , and radiation threat ? Why are runaway toyoya cars not admitted to for years. This is not a culture to invest in , They are very capable people and will come out fine with thier own ingenuity , I would seek to help rather than Fleece them at this dire time in thier countries history .

March 27 2011 at 8:22 AM Report abuse +1 rate up rate down Reply

thats it allright!

March 27 2011 at 8:05 AM Report abuse rate up rate down Reply
Connor Wisnom

maybe the dumbasses shouldn't have built nuclear reactors on a fault line...?

I'm utterly fascinated by the fact that japan has a much higher level of education then the US. It's mind boggling, seriously.

March 26 2011 at 10:15 PM Report abuse -2 rate up rate down Reply
1 reply to Connor Wisnom's comment

Are You a New York City resident?

March 27 2011 at 5:53 AM Report abuse +1 rate up rate down Reply

This is also why the USA has armys in lots of countrys, because the power ful are getting them sent there, this way they have there foot in the door and can invest and control the country. There is few if any countrys that the USA and UN didn,t intervien in that they didn,t set up a army base there and always had a presience there. I will bet a thousand bucks that a base will always be in Iraq, and one in every country we are fighting in right now. Google how many military bases in the world the USA has and you will see what i mean. This is one of the reasona Russia and China is getting nurvise and jettery about the whole thing in Lybia, this is also why the USA is saying and speaches that this operation is not a USA operation but a UN operation, because they don,t want the rest of the world saying we the USA are grabbing power in the middle east.

March 26 2011 at 6:06 PM Report abuse +1 rate up rate down Reply

This is what i said yesterday about the power people investing in disasters, they love them, and some times they make tons of money, just like when they invested in the USA in ways that no one will know when the great recession hit. This is the time when the big power people will GAIN complete controll over Japan, they don,t buy to just buy they buy to OWN. These idiots think that they are investing out of the goodness of there hearts YA RIGHT they invest to OWN the what they invest in, thats how the powerful do things. When this is all over with and Japan is built back up some what Japan will not be Japan anymore it will be owned buy many other powerful people just like the USA is today. Hate to tell you folks but when these people spend that kind of money they want a long term return this way they will have a powerful SAY how Japan is rebuilt.

March 26 2011 at 5:55 PM Report abuse +1 rate up rate down Reply

It isn't right to make money on the back of the suffering.

March 26 2011 at 5:00 PM Report abuse +2 rate up rate down Reply
1 reply to yourcountry2's comment
Ange Purs

This isnt suffering that you or me or mankind caused. It was a natural disaster. Somebody is going to have to invest in Japan's clean up. Japan will benefit from that and those who back the cleanup will benefit too. That's why a Japan cleanup investment is NOT onerous.

March 26 2011 at 5:09 PM Report abuse +4 rate up rate down Reply
Ange Purs

You cant compare an Egypt ETF with a Japanese ETF. The 2 countries have nite and day cultural differences. Japan has always been a major world economic player and Egypt never has...or probably will never be. Japan is the world's 3rd largest economy. They do it right. They buy their own debt unlike in the US where we let the world buy it. Compare the speed at which Japan rebuilt Kobe with what happened in the aftermath of Katrina. They get the economic job done. To bet against them economically is just plain stupid. Japan and its markets will recover. If you buy a japanese ETF expecting a SHORT TERM profit, you've set yourself up for a potential failure. If you're willing to keep your Japanese investment for a year or 2, you will realize a decent profit.

March 26 2011 at 4:54 PM Report abuse +4 rate up rate down Reply
1 reply to Ange Purs's comment

Yeah, we let the world buy our debt then the Fed prints more and more money.... They've done it too many times since this Pres. took office. That is why China and the World Bank are buying up GOLD.... The American dollar is losing value fast and is no longer going to be World Currency... The dollar is going down the crapper... Guess we'll wait and see were we are when we come out the other end of the pipe!

March 26 2011 at 6:07 PM Report abuse +3 rate up rate down Reply

GOD BLESS PRESIDENT OBAMA = courage, wisdom, decisiveness ! Obama's handling of the Egyptian crisis and now the Libyan crisis plus Japan proves what a brilliant & great leader he is , respected and admired the world over

See full article from DailyFinance: http://srph.it/hnkU13

March 26 2011 at 10:57 AM Report abuse -8 rate up rate down Reply
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March 26 2011 at 10:56 AM Report abuse -6 rate up rate down Reply
3 replies to fpfp040408's comment