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What Is a Japan ETF?
Let me explain what a Japan ETF is: it's an exchange-traded fund that puts most of its assets into Japanese investments traded on local stock exchanges. These are diversified options with low entry costs and management fees.
You trade Japan ETFs on stock exchanges just like company stocks. They give you access to Japan's economy through currencies, equities, and fixed-income markets. As an investor, you have over a dozen choices available on U.S. exchanges.
Key Takeaways
Remember, a Japan ETF invests in Japanese assets from local exchanges. Shares trade like corporate stock on exchanges. Japan has major indices that ETFs track, plus strategies for small- and mid-cap equities and currencies. You can access the Japanese market by buying ETF shares instead of individual stocks or securities. The Japan ETF market is smaller compared to something like the U.S. market.
How Japan ETFs Work
In the past, investing in foreign markets like Japan's was only for sophisticated traders. Now, average investors like you can participate and benefit from global capital shifts, thanks largely to exchange-traded funds.
ETFs pool money from investors with similar goals. They're listed on exchanges and trade all day like regular stocks. They aim to match the performance of a broad market, sector, or trend by copying the holdings of a specific index—a hypothetical portfolio representing a market or its segment.
For international investors, Japan ETFs offer an easy way to get exposure to the country without picking individual stocks and risking everything on one. These are passively managed around broad indices like the MSCI Japan Index, which covers about 85% of the free float-adjusted market cap in Japan.
As of January 2024, you can choose from 20 Japan ETFs on U.S. exchanges, holding about $31 billion in combined assets. They track eight major Japanese stock indices, plus small- and mid-cap strategies and currencies.
Special Considerations
Japan is an advanced economy with a big equity market, so there are many ETFs available, including those focusing on smaller companies, dividends, or value stocks. Like larger ETFs, some can be shorted or accessed via options.
That said, don't underestimate currency fluctuations' impact on returns. If the U.S. dollar strengthens against the yen, an unhedged ETF will lose on currency, offsetting stock gains.
In times of dollar strength, investors often prefer hedged ETFs to avoid currency risk, aiming for returns closer to the local currency performance of Japan's major indices.
Important Note on Performance
Keep in mind that a Japan ETF's performance might not match the underlying index when measured in U.S. dollars. You have to factor in the yen-dollar exchange rate changes.
Advantages and Disadvantages of Japan ETFs
Investing in Japan ETFs lets you diversify and enter a new market, but there are pros and cons. I'll outline them directly.
Advantages
Japan has the third-largest economy by nominal GDP and hosts world-leading industrial and tech companies. Its position makes it attractive for investors like you worldwide.
The Japan Exchange Group, owner of the Tokyo Stock Exchange, is a large, progressive exchange in Asia Pacific, drawing investor attention. Japan ETFs provide a single diversified investment in the country, while betting on the yen's strength against the dollar. They open you up to competitive Japanese companies and major brands.
Disadvantages
Japan faces economic challenges like decades of deflation, an aging population, and high debt.
Its market is more limited in size and variety than the U.S. ETF market, possibly due to Asia's commission-based fee structures versus the U.S. fee-only model. These ETFs are susceptible to economic risks and tend to be commission-based for Asia focus.
Example of a Japan ETF
Take the iShares MSCI Japan ETF (EWJ) as a well-known example. It seeks to match the MSCI Japan Index using market cap weighting, where bigger companies have more representation.
The ETF and index are very similar, with low tracking error. Both are topped by Toyota, over 5% of assets as of January 2024, mainly in industrials, consumer discretionary, financials, and tech.
What Is the Biggest Japan ETF?
The largest is the iShares MSCI Japan ETF (EWJ), with $14.6 billion in assets under management as of January 2024. It invests in 225 top Japanese companies to track the MSCI Japan Index.
What Are Japan's Biggest Industries?
Japan leads in exporting manufactured goods. It's the second-largest auto exporter and produces a lot of machinery and electronic equipment.
Was Abenomics a Success?
Abenomics covers the policies of former Prime Minister Shinzo Abe. He pushed shareholder-friendly reforms, urging companies to stop hoarding cash and boost dividends and buybacks. He also introduced negative interest rates to stimulate spending and weaken the yen, aiding exporters with a competitive edge.
The Bottom Line
A Japan ETF invests in a basket of Japanese equities, giving international investors exposure to a major manufacturing economy. Like other ETFs, it diversifies across the economy without depending on one company. But remember, international ETFs carry extra risks.
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