A Japan ETF is an exchange-traded fund (ETF) that invests the majority of its assets in Japanese equities and other assets that trade on local stock exchanges. These ETFs offer a diversified investment with lower initial investment requirements and management costs.
Just like company stocks, Japan ETFs trade on stock exchanges, providing investors access to the Japanese economy through currency, equity, and fixed-income markets. Investors can choose from over a dozen options that trade on U.S. stock exchanges.
Key Takeaways
- Japan ETFs are exchanged-traded funds that invest in Japanese assets on local exchanges.
- Shares trade on stock exchanges similar to corporate stock.
- Japan hosts major indices tracked by ETFs, among others that focus on small- and mid-cap equity strategies and currencies.
- Investors gain access to Japanese markets and the economy via ETF shares instead of individual stocks or securities.
- The Japan ETF market is smaller relative to others like the U.S.
How Japan ETFs Work
Investing in foreign stock markets used to be an opportunity available only to sophisticated traders. Today, average investors can profit from global capital movements, thanks to exchange-traded funds.
ETFs pool assets from investors and trade on exchanges like ordinary stocks. They aim to replicate the performance of a broad equity market, specific sector, or trend by mirroring the holdings of an index—a hypothetical portfolio representing a particular market or segment.
Japan ETFs offer international investors exposure to the country without buying individual stocks and consolidating risks. Most Japan ETFs mirror indices like the MSCI Japan Index, covering around 85% of the free float-adjusted market capitalization in Japan.
As of January 2024, investors have 20 Japan ETFs trading on U.S. stock exchanges, holding combined assets of about $31 billion. These ETFs track eight major indices on Japan’s stock market in addition to those focusing on small-, mid-cap strategies and currencies.
Special Considerations
Japan is an advanced economy with a significant equity market. Consequently, numerous ETFs focus on smaller, emerging companies, dividends, or value stocks. Larger, liquid Japan ETFs can also be sold short and accessed via listed options.
Investors often overlook how currency fluctuations impact returns. When the U.S. dollar rises against the Japanese yen (JPY), an unhedged ETF faces currency losses that could negate stock market gains. Currency-hedged ETFs mitigate this risk, aiming to reflect local currency returns more closely.
The performance of a Japan ETF may not correlate directly with its underlying index due to changing exchange rates between the yen and the dollar.
Advantages and Disadvantages of Japan ETFs
Investing in Japan ETFs allows diversification and access to a new market, alongside other benefits. However, these investments come with certain risks and downsides.
Advantages
- Advanced Economy: Japan, with the world’s third-largest economy, hosts many leading industrial and tech companies.
- Progressive Stock Exchange: The Japan Exchange Group, owning the Tokyo Stock Exchange, is influential in the Asia Pacific region.
- Diversified Investment: They offer a single, diversified investment opportunity and a stake in the yen’s strength versus the dollar.
Disadvantages
- Economic Issues: Japan faces chronic deflation, an aging population, and high debt levels.
- Smaller Market Size: Japan’s ETF market is smaller compared to the U.S., with fewer product varieties.
- Commission-Based Products: Asia-focused ETFs are generally sold on commission, differing from the U.S. fee-only model.
Pros
- Access to a large, innovative market.
- Exposure to globally competitive Japanese companies.
- Includes major brands and various economic sectors.
Cons
- Vulnerable to economic instability.
- Smaller market size and limited variety compared to U.S.
- Often operate on a commission-based fee structure.
Example of a Japan ETF
The iShares MSCI Japan ETF is one of the most recognized ETFs in this category. The fund aims to match the MSCI Japan Index using a market capitalization-weighted method. This suggests that a company’s representation correlates with its size.
iShares’ Japan ETF mirrors the MSCI Japan Index closely, ensuring minimal tracking error. Toyota, a leading company, embodies over 5% of the total assets with industrials, consumer discretionary, financials, and technology stocks predominantly represented.
What Is the Biggest Japan ETF?
The largest Japan ETF is the iShares MSCI Japan ETF, managing $14.6 billion in assets as of January 2024. The fund invests in 225 leading Japanese companies to track the MSCI Japan Index.
What Are Japan’s Biggest Industries?
Japan ranks as one of the top global exporters of manufactured goods, the second-largest for automobiles, producing notable amounts of machinery and electronic equipment.
Was Abenomics a Success?
Abenomics denotes economic policies led by former Prime Minister Shinzo Abe between 2006-2007 and 2012-2020. Abe introduced shareholder-friendly reforms, encouraging companies to increase dividends and stock repurchases. Negative interest rates were employed to stimulate spending and depreciate the yen, helping exporters compete globally through a devalued currency.
The Bottom Line
A Japan ETF invests in a spectrum of Japanese equities, offering international investors access to one of the world’s major manufacturing economies. Similar to other ETFs, Japan ETFs provide broad exposure to the country’s economy but carry distinct risks with international investing.
Related Terms: ETFs, exchange-traded fund, investment strategy, stock exchanges, diversification, financial instruments.
References
- MSCI. “MSCI Japan Index (USD)”.
- ETF.com. “Japan ETF Overview”.
- Just ETF. “How to Invest in Japan Using ETFs”.
- The World Bank. “GDP (Current US$)”.
- Statista. “Leading Stock Exchanges in the Asia Pacific Region as of May 2023, by Domestic Market Capitalization”.
- iShares. “iShares MSCI Japan ETF”.
- BlackRock. “iShares MSCI Japan ETF”.
- Santander Trade. “Japanese Foreign Trade in Figures”.
- National Bureau of Economic Research. “Bank of Japan Equity Purchases: The Final Frontier in Extreme Quantitative Easing”. Pages 7-9.
- Council on Foreign Relations. “Abenomics and the Japanese Economy”.
