An investor who is gaining exposure to international markets, specifically Japanese markets, faces a few decisions. They must decide which index to track capital against, and for the sake of this paper we will compare TOPIX and MSCI Japan. The MSCI Japan Index, like the TOPIX, is designed to measure the performance of the broader Japanese market. The two indices have tracked similarly since 2010, as shown by the below graph1.
The TOPIX Index typically holds a 99% correlation to the MSCI Japan. Hence, if you are currently benchmarked to the MSCI Japan, say through an MSCI Japan ETF, it may be advantageous to transition that exposure to TOPIX futures to gain similar exposure without capital strain and currency risk.
Specific to currency risk, when you carry your Japanese exposure at CME through TOPIX futures, you are not exposed to what the exchange rate between the US and Japan currencies will do during the duration of your futures contact. The MSCI EWJ US Equity is not giving the right exposure to MSCI Japan due to the fact the EWJ is USD denominated. This difference in exposure between the futures and ETFs becomes more apparent during a “bull market.” When the U.S. economy is strong, typically the Japanese Yen depreciates vs. the dollar which will hinder the performance of the MSCI Japan ETF2 because of the currency performance component of the fund.
CME now offers Basis Trade at Index Close (BTIC) functionality on Equity Index futures. It links futures to the cash market and enables market participants to execute a basis trade relative to the official close for the underlying index for more efficient cash management. It is a convenient way to access daily closing prices, which is beneficial to a lot of indexed investors. A BTIC transaction for TOPIX futures provides the ability to trade the future at a price understood to be the theoretical equivalent of the official cash index close with given assumptions on dividends and all-in implied financing to maturity which will give the customer the opportunity to exit their ETF position and gain a futures position without the risk of slippage. This helps customers manage investment flows tied to the MSCI Japan cash close.
A fund manager benchmarked to the TOPIX Index receives an inflow of $10M to be used on the day's closing index level
 CME Group Inc. and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
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