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Japan ETF

An exchange-traded fund that baskets a number of equities that are exposed to Japan’s economic growth and profits

What is a Japan ETF?

A Japan ETF is an exchange-traded fund that baskets a number of equities that are exposed to Japan’s economic growth and profits. Equities include major corporations such as Honda Motor Co. and Sony Corp. Therefore, Japan ETFs offer investors the opportunity to be exposed to Japan-based businesses, along with many other renowned Japanese conglomerates.

 

Japan ETF

 

Summary

  • A Japan ETF is an exchange-traded fund that baskets a number of equities that are exposed to Japan’s economic growth and profits.
  • The top three Japanese ETFs are iShares JPX-Nikkei 400, Franklin FTSE Japan ETF, and the JPMorgan BetaBuilders Japan ETF.
  • Japan ETFs can be used as financial instruments that hedge against currency risk within a portfolio.

 

Japan’s Economy

The Japanese economy is renowned for its import-focused activities. It produced approximately $5.6 trillion in 2018 and is the world’s fifth-largest economy after China, the U.S., the EU, and India. Its standard of living is lower than the U.S. but higher than China. Approximately 126.5 million individuals reside in Japan.

Japan’s largest exports are automobiles, steel products, and semiconductors, while its imports involve oil and liquified natural gas.

It has suffered from deflation and slow economic growth since the 1990s. It yields a large debt-to-GDP ratio, indicating that the nation owes more than what it generates annually.

 

Understanding Japan ETFs

Japan ETFs tend to follow an underlying index that captures a majority of the total market capitalization of all Japanese equities.

The Japanese ETF market yields larger restrictions relative to the U.S. ETF market in both size and variety. The differences may stem from the fee structure within Asian markets.

Japan ETFs are also used as currency-hedged instruments, which can help reduce the currency risk present within their investments.

 

What is the Tokyo Stock Exchange?

The Tokyo Stock Exchange is known as one of the biggest and highly progressive markets in Asia. Headquartered in Tokyo, it is known to be the largest stock exchange in Japan. It was originally established on May 15, 1878.

The Tokyo Stock Exchange is run by the Japan Exchange Group and yields the largest Japanese conglomerates, such as Toyota, Honda, and Mitsubishi.

The five largest stocks based on market capitalization on the Tokyo Stock Exchange include:

  • Toyota Motor Corporation
  • SoftBank Group
  • Keyence Corporation
  • Chugai Pharmaceutical Co.
  • Sony Corporation

 

Japan ETFs capture the diversification of the indexes, which are aggregated from Asia’s stock exchanges.

 

Top Three Japanese ETFs

The following are the top three Japanese ETFs:

 

1. iShares JPX-Nikkei 400 ETF

The iShares JPX-Nikkei 400 ETF is an index that gauges the performance of large and mid-cap Japanese equities, ultimately resulting in a blended strategy. The fund is broken down into various industries, with the majority of holdings stemming from industrials, and then consumer goods and information technology.

The fund’s top three holdings are Sony, a conglomerate company that produces electronic engagement devices, Keyence Corp., a manufacturer of industrial machinery, and Nintendo, a producer of electronic and video game consoles. Its inception date backs to October 26, 2001 and yields approximately $95.3 million.

 

2. Franklin FTSE Japan ETF

The Franklin FTSE Japan ETF follows the FTSE Japan Capped Index, which encapsulates large to mid-cap Japanese stocks. The majority of the ETF’s holdings are in the industrial sectors, followed by consumer discretionary and IT. Its top three holdings include Toyota, Sony, and Softbank Group Corp. Its inception date is November 2, 2017.

 

3. JPMorgan BetaBuilders Japan ETF

The JPMorgan Betabuilders Japan ETF follows the Morningstar Japan Target Market Exposure Index, which consists of stocks that are publicly traded on the Tokyo and Nagoya stock exchanges. The BBJP ETF primarily focuses on Japanese large-cap equities, which inherently make the equity value-driven and safer.

Similar to the iShares JPX-Nikkei 400 ETF AND Franklin FTSE Japan ETF, the distribution is heavily weighed upon industrial stocks, consumer goods, and the IT sector. Their largest holdings are Toyota, Sony, and Softbank. Their inception date is June 15, 2018.

 

Historical Performance

On the U.S. stock exchange, there are 12 distinct Japanese ETFs. The ETFs generally carry stocks of U.S. companies as opposed to Japanese corporate debt or government bonds. It is important to note that the performance of Japanese ETFs does not fully correlate with the performance of their respective index in U.S. dollars, particularly due to the fluctuations in exchange rates and conversions.

Based on the MSCI Japan Index, Japanese ETFs tend to underperform against U.S. equities, carrying approximately 13.9% the past year and the Russell 1000 generating a return of 19.5%. The highest performer is the iShares JPX-Nikkei 400 ETF, relative to the remaining two.

 

Additional Resources

CFI offers the Capital Markets & Securities Analyst (CMSA)® certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below:

  • Debt-to-GDP Ratio
  • Market Capitalization
  • Diversification
  • Stock Exchange-Traded Fund

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