What Is a Yen ETF?

What Is a Yen ETF?

Let me explain what a Yen ETF is. It's an exchange-traded fund that tracks the relative value of the Japanese yen, or JPY, in the foreign exchange market. This tracking happens against a single currency or a basket of other currencies.

These ETFs primarily invest in yen-backed assets, such as short-term debt instruments and bonds, or they simply hold the spot currency in interest-bearing accounts. If you're looking to get exposure to the yen, investing in one of these gives you access without needing to set up a forex account.

Key Takeaways

Here's what you need to know right away. A yen ETF tracks Japan's currency value against a basket or a single currency. It invests in futures contracts, debt securities, money market funds, and cash deposits, all mainly in yen.

Some of these ETFs match the income from yen assets to a dividend yield, while others use it to cover management expenses. You'll also find leveraged yen ETFs that offer 2x long or short exposure to USD/JPY movements. Historically, the yen is seen as a safe haven, drawing investors during times of geopolitical risk.

How Yen ETFs Work

Buying and selling foreign currencies used to be complicated, requiring a foreign exchange account and typically reserved for experienced traders. But ETFs have changed that, making the forex market more accessible to you as an average investor.

Currency ETFs are pre-packaged investments that track specific currencies, much like regular ETFs replicate an index. They trade on stock exchanges like stocks, with prices fluctuating as traders buy and sell throughout the day.

Yen ETFs specifically track Japan's currency performance relative to something like the U.S. dollar, euro, or a currency basket. They give you easy, affordable access to trade currencies during the day, help diversify your portfolio, and can be used for arbitrage or hedging against major economic events.

The portfolios usually include yen-denominated futures contracts, debt securities, money market funds, and cash deposits. These generate income through yen performance against other currencies and interest from securities. Some ETFs pass this income as dividends; others use it for expenses.

Fast Fact

Just so you know, there are three JPY ETFs trading in the United States, according to VettaFi (formerly ETF Database).

Special Considerations

If you hold yen ETFs or any currency ETFs, you should keep an eye on major economic data affecting your investments. This includes GDP releases, retail sales, industrial production, inflation, trade balances, employment figures, interest rates, central bank meetings, and daily news flow.

Also factor in interest rates, inflation, and the country's equity market performance when assessing a foreign currency's attractiveness. For Japan and yen traders, very low inflation and interest rates have historically made the yen attractive for carry trades—borrowing cheaply in yen to fund higher-yield investments elsewhere.

Don't overlook the Tankan survey. It's a quarterly economic survey of Japanese businesses published by the Bank of Japan, used for monetary policy formulation, and it often influences trading in Japanese stocks and currency.

Important Note

Most currency market movements are driven by interest rates, inflation, a country's economic conditions, and political stability.

Advantages and Disadvantages of Yen ETFs

There are clear benefits and drawbacks to yen ETFs, many of which apply to other currency ETFs too. Let's start with the advantages. Investing in foreign currencies protects you if your home currency declines. Over the years, many have chosen the yen, the third-most traded currency globally after the USD and euro, and the most traded in Asia.

The yen provides diversification, often trading inversely to other major currencies against the USD. It's used as a reserve currency in international transactions and has a safe-haven reputation. Japan is the world's largest creditor, and traders believe Japanese investors repatriate funds during hardships, boosting yen demand and value.

Now, the disadvantages. Some see currency ETFs as risky due to global macroeconomic events affecting values, even in stable nations like Japan. Unpredictable natural disasters, like the 2011 Fukushima event, can surge the yen's value then lead to recession.

Analysts question the yen's safe-haven status due to Japan's trade deficits, local managers buying higher-yield foreign assets, and companies lacking good domestic capital options. The yen has lost appeal as a carry trade with low rates becoming common worldwide.

This reminds you that forex trading isn't for the unprepared. You must know major currencies, stay updated on economic stats, underlying economies, and factors like commodities or interest rates.

Examples of Yen ETFs

The most popular is the Invesco CurrencyShares Japanese Yen Trust (FXY), with $279.2 million in assets under management as of December 2023. Launched in February 2007, it mirrors the yen's price and performance against the USD by holding yen on deposit, with a 0.40% expense ratio.

Other options include the ProShares Ultra Yen ETF (YCL) and ProShares UltraShort Yen ETF (YCS). Note that these are leveraged; YCL gives 2x long exposure, and YCS provides 2x inverse exposure.

How Can I Invest in Yen?

As an ordinary investor, Japanese Yen ETFs are the easiest way to gain access to the yen.

What Is the Main ETF That Trades the Japanese Yen?

The Invesco CurrencyShares Japanese Yen Trust (FXY) is the most common, holding physical yen. ProShares offers the Ultra Yen ETF (YCL) for 2x long exposure and UltraShort Yen ETF (YCS) for 2x inverse exposure.

How Do I Invest in the Nikkei?

You can invest in Japan's Nikkei 225 index via ETFs like the iShares Core Nikkei 225 ETF or Xtrackers Nikkei 225 UCITS ETF.

The Bottom Line

A yen ETF invests in bonds and instruments reflecting the Japanese currency's value in forex markets. Low inflation has made the yen attractive to some traders in the past, though currency ETFs can be risky.