The WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) is pulling in assets more quickly than any ETF in a while, and it’s all linked to Japan’s aim to weaken its currency. But is this just hot money that will run for the exits the moment the yen looks to be strengthening again? Jeremy Schwartz, WisdomTree’s director of research, told IndexUniverse.com Correspondent Cinthia Murphy he didn’t think so.

Schwartz sees DXJ as a lasting tool to help investors control currency-related volatility in their portfolios. Still, he isn’t convinced that the success of DXJ is some harbinger about the prospective nature of currency-hedged strategies in general, particularly in the emerging markets, where he reckons currencies are likely to keep appreciating against the dollar and pump up returns for U.S. investors for quite some time.

IU.com: DXJ has been on a roll, raking in more than $800 million in fresh assets in 2013 alone on a weakening yen. Is DXJ’s rise in popularity a result of Japan’s unique situation or an example of investors’ growing demand for currency-hedged funds?

Schwartz: When we first started looking at currency-hedged ETFs, we first looked at a very broad international fund—we like to call it our EAFE competitor. It was a very important strategic fund, because by hedging the currency exposure in the portfolio, you lowered the volatility by 2 to 3 percentage points a year. You were essentially getting S&P 500-like volatility out of an international equities portfolio. That’s a good way to access international markets.

The case for Japan, however, has been in some ways a very unique one, because it’s the only country in the world that has such a strong negative correlation between the strength of the currency and the equity market. And you have this 30-year trend where you saw deflation and the strengthening of the yen really hurting companies’ revenues. Now that the yen has been weakening, markets there have been really rallying.

But the key here is that while it makes sense to increase your exposure to Japanese equities in this current environment, because the yen is weakening—as it has in the past few weeks—unless you have a currency hedge, it will really hurt your U.S.-dollar returns. That’s where DXJ comes in.

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