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BOJ ETF plan

BOJ ¥300 Billion Plan to Buy Nonexistent ETFs

BOJ ¥300bil plan to support “companies investing in physical and human capital” via high cap-ex indices is missing one ingredient: the high cap-ex ETF investment vehicles.

(Bloomberg) by Bank of Japan Gov. Haruhiko Kuroda has a new plan. He’s going to buy ¥300 billion ($2.5 billion) of something that doesn’t exist.

Markets were roiled Friday after the BOJ unveiled measures including purchasing exchange-traded funds that track companies which are “proactively making investment in physical and human capital.”

The central bank will spend ¥300 billion a year from April buying such securities to offset the market impact as it resumes selling stocks purchased earlier from financial institutions.

The only problem is such ETFs have never been made in Japan, at least not yet. Even as fund providers start hundreds of “smart beta” products that choose stocks based on everything from dividends to volatility, ETFs that pick companies for how they deploy their cash are rare in global markets.

“These kinds of ETFs don’t exist now. Using capital spending as a factor in deciding what goes in an ETF is quite unusual,” said Koei Imai, who oversees $25 billion of ETFs at Nikko Asset Management Co. in Tokyo. “I think the message from the BOJ is for us to go out and make them.”

The central bank is aware such products aren’t yet available and in the meantime will buy ETFs tracking the JPX-Nikkei Index 400, a government-backed equity measure started last year that chooses companies based on return on equity and operating profit. The BOJ also already purchases ETFs linked to the Nikkei 225 stock average and Topix index and owns roughly half of the market for ETFs in Japan.

“High-capex indexes are in their infancy in all markets but it is something we have looked at in the past and have some familiarity with,” said Jason Miller, head of BlackRock Inc.’s ETF unit in Japan, who says his company offers no such ETFs globally. “It is no surprise to see greater demand for this tilt to quality, particularly given the macro backdrop.”

In May, Elkhorn Investments started an ETF in the U.S. that tracks the S&P 500 Capex Efficiency Index, which invests in companies that have boosted sales through capital expenditures. The ETF has attracted $1.2 million in assets.

No products like the ones the BOJ intends to buy are listed on the Tokyo bourse, according to Japan Exchange Group Inc. spokeswoman Miwa Aonuma. She declined to comment on whether there are plans to start such ETFs.

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