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Stocks

ETF's turnover cloaks bearish view of Japan's retail investors

TOKYO -- Retail investors in Japan have shifted from bargain hunting to staying on the sidelines, with a close look at one exchange-traded fund hinting at pessimism even amid a bull market.

     The market was shaken Wednesday afternoon by comments from Bank of Japan Gov. Haruhiko Kuroda apparently aimed at checking the yen's depreciation. The Nikkei Stock Average slid as the yen jumped, stopping just shy of falling under 20,000. This was an ideal buying opportunity for retail investors, who had been waiting for downturns in keeping with their contrarian strategies.

     But the yen quickly settled down Thursday, and the Nikkei average advanced more than 330 points, bolstered by rallies in Europe and the U.S. This prompted retail investors to step back from the market.

     They "were waiting for [the Nikkei average] to drop below 20,000, but they were disappointed," said Tsutomu Yamada at kabu.com Securities.

     Since the start of the year, this pattern has repeated when the market has been on the rise. Even when foreign traders led a sharp rally in stock prices, individuals switched en masse to selling. Key stocks popular among retail investors, including Takeda Pharmaceutical and ANA Holdings, saw their proportion of shares held by individuals drop across the board at the end of March.

     The Next Funds Nikkei 225 Leveraged Index Exchange Traded Fund reflects the mindset of individual traders still worried about downside risk. The ETF has been a constant presence at the top of the turnover rankings. Its turnover was 141.8 billion yen ($1.14 billion) Thursday, 80% higher than that of Mitsubishi UFJ Financial Group, the top issue on the Tokyo Stock Exchange's first section.

     The ETF, which doubles changes in the Nikkei average, is traded mainly by retail investors. The brisk trading would seem to indicate the fund is being snapped up by bullish retail investors hoping to double their gains. But changes in the shares held by investors reveal a different story.

     When buying pressure from individuals builds, ETFs become overpriced compared with the Nikkei average. When this happens, brokerages buy up comparatively underpriced cash stocks and convert them to pricier ETF shares, then sell them at a profit. This process increases the outstanding ETF shares held by investors. Conversely, when selling pressure from individuals grows, the total falls.

     The number of Nikkei 225 Leveraged Index ETF shares held by investors rose during the May rally but shrank after the Nikkei average broke 20,000. It dropped by nearly half between May 22 and Thursday to 10.12 million shares as retail investors concerned about an overbought market switched to selling.

     The startup-focused Mothers index, which sees heavy trading by individuals, hit its first year-to-date high in a week Thursday. Some argue that with blue chips looking less undervalued, retail investors are turning to small- and mid-cap stocks that remain cheap despite strong earnings.

     But this remains a localized trend. Based on the drop in Nikkei 225 Leveraged Index ETF shares held by investors, many individuals seem to think growth in the market as a whole is still some way off. Stronger incentives are needed to get retail investors to change their contrarian ways and ensure all market players participate fully.

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