Best Japan ETFs for 2024
In the last decade, Japan suffered a prolonged period of economic stagnation, often referred to as "the Lost Decade." This left many investors wary of investing in the country’s stock market. In recent years, however, the Japanese stock market has once again been gaining attention among foreign investors.
Investor sentiment has slowly been turning, and investors are beginning to ask themselves whether it is worth considering Japanese ETFs for their investment portfolio. This article examines some advantages and disadvantages of investing in Japanese equities and provides a list of some of the best Japan ETFs to watch this year.
Table of Contents
Key Takeaways
- Japan ETFs are exchange-traded funds that invest primarily in Japanese stocks. Foreign investors from the UK can buy these funds to gain exposure to the performance of the Japanese stock market.
- Japan has a highly developed economy that produces and exports complex products like automobiles, electronics, and machinery. Many Japanese companies possess advanced expertise that puts them in a competitive position on the global stage.
- Japan’s population is ageing more rapidly than many other developed nations, which has been and continues to be a drag on economic growth.
What are Japan ETFs?
An ETF is an exchange-traded fund. Just like a regular stock, ETFs are traded at a single price on a stock exchange and can be bought or sold by investors. The difference is that an ETF is a fund that invests in a basket of different stocks.
A Japan ETF will invest in a basket of Japanese companies that track a particular index of the region. When an investor buys a Japan ETF, they receive the collective performance of all the Japanese companies in the underlying ETF.
Best Japan ETFs to Watch
As always, it is important to note that what constitutes the “best” investment is heavily dependent on each investor’s personal goals and financial situation. What’s crucial is that investors take the time to properly research their options and know what they’re buying into as they build their portfolios. This list of Japan ETFs could serve as a starting point for that research.
- iShares MSCI Japan ETF – Japanese Large and Medium Capitalisation Stocks Covering 85% of the Japanese Economy
- WisdomTree Japan Hedged Equity Fund ETF – Currency Hedged ETF of Globally Oriented Japanese Companies that Pay Dividends
- iShares Core MSCI Japan IMI ETF – Broad Japan ETF Covering More than 99% of All Japanese Equity
iShares MSCI Japan ETF – Japanese Large and Medium Capitalisation Stocks Covering 85% of the Japanese Economy
The iShares MSCI Japan ETF is issued by BlackRock, the largest financial asset manager in the world. The fund tracks the MSCI Japan Index, which is an index representing large and medium-sized Japanese stocks. The index covers almost 240 companies and represents 85% of Japan’s stock market.
The top ten holdings of the fund based on the size of capital allocation are Toyota, Sony, Mitsubishi Financial Group, Keyence, Tokyo Electron, Hitachi, Mitsubishi, Sumitomo Mitsui Financial Group, Shin Etsu Chemical, and Daiichi Sankyo. Toyota accounts for roughly 5% of the fund’s capital allocation, and Daiichi Sankyo roughly 1.6%.
The main economic sectors represented in this fund are Industrials (~23%), Discretionary Consumer Goods (~19%), Information Technology (~14%), and Financials (~12%). The rest of the fund’s capital is spread in varying smaller amounts over several other sectors, including Health Care, Communication, and Staple Consumer Goods.
The fund trades under the ticker symbol ‘EWJ’ on the New York Stock Exchange (NYSE). With Admirals, you can trade the iShares MSCI Japan ETF CFD (contracts for difference) which allows you to trade long and short.
WisdomTree Japan Hedged Equity Fund ETF – Currency Hedged ETF of Globally Oriented Japanese Companies that Pay Dividends
The WisdomTree Japan Hedged Equity Fund ETF follows an index of dividend-paying companies headquartered in Japan that derive less than 80% of their revenue from sources in Japan. By doing so, the index is tilted towards companies that generate income on a more international basis.
This ETF is also currency-hedged, which means that along with buying Japanese equity, it also buys forward contracts to lock in a certain currency exchange rate in the future. This means that in its performance, it suffers less from a weakening yen but also doesn’t profit as much from a strengthening yen.
The top ten holdings of this ETF are Toyota, Mitsubishi Financial Group, Mitsubishi, Sumitomo Mitsui Financial Group, Mitsui & Co, Tokyo Electron, Japan Tobacco, Tokio Marine Holdings, Takeda Pharmaceuticals, and Honda. Toyota accounts for roughly 5% of the fund’s capital allocations, and Honda represents roughly 2%. 70% of the fund’s capital is invested in companies outside the top ten holdings.
The main economic sectors this ETF covers are Industrials (~27%), Discretionary Consumer Goods (~17%), Financials (~15%), Information Technology (~11%), and Materials (~11%). The rest of the fund's capital is spread in smaller amounts over several other sectors, including Health Care and Staple Consumer Goods.
The fund trades under the ticker symbol ‘DXJ’ on the London Stock Exchange (LSE), as well as the Swiss and Italian stock exchanges. With Admirals, you can trade the WisdomTree Japan Hedged Equity Fund ETF CFD.
iShares Core MSCI Japan IMI ETF – Broad Japan ETF Covering More than 99% of All Japanese Equity
The iShares Core MSCI Japan IMI ETF tracks an index that covers nearly the entire Japanese stock market, representing large-, medium-, and small-capitalisation equity. The index contains nearly 1100 companies and covers more than 99% of all Japanese equity.
The top ten holdings of this fund by size of capital allocation are Toyota, Sony, Mitsubishi Financial Group, Keyence, Tokyo Electron, Hitachi, Mitsubishi, Shin Etsu Chemical, Sumitomo Mitsui Financial Group, and Daiichi Sankyo. Toyota represents roughly 4% of the fund’s capital, and Daiichi Sankyo roughly 1.3%.
The main four economic sectors represented in this fund’s holdings are Industrials (~23%), Discretionary Consumer Goods (~18%), Information Technology (~13%), and Financials (~11%). The rest of the fund’s capital is spread in smaller amounts over a number of other sectors, including Health Care, Consumer Staples, and Communication.
The fund trades under the ticker symbol ‘SJPA’ on the London, Swiss, and Italian stock exchanges. It also has listings under ‘IJPA’ on Euronext and the London Stock Exchange.
How to Invest in Japan ETFs
With Admirals, you can invest in global stocks and ETFs with the following commissions:
- UK stocks and ETFs – 0.1% of trade value, 1 GBP minimum commission
- US stocks and ETFs – From $0.02 per share, 1 USD minimum commission
- Germany and France stocks and ETFs - 0.1% of trade value, 1 EUR minimum commission
- Japan stocks and ETFs - 0.15% of trade value, 1250.00 JPY minimum commission
You can learn more about investing commissions on the Admirals Contract Specification page. You can search for global stocks and ETFs from the Invest.MT5 web platform and invest in four steps:
- Open an account with Admirals.
- Click on Trade on one of your live or demo trading accounts to open the web platform.
- Search for your symbol at the top of the search window.
- Click Create New Order in the bottom window to open a trading ticket to input your trade size, stop loss and take profit level.
Pros & Cons of Japan ETFs
There are advantages and disadvantages to investing in Japan ETFs. Japan’s economy is highly developed, and government policies are traditionally pro-business. Japan is the third-largest economy worldwide and produces many complex products like automobiles, electronic equipment, machinery, and chemicals. The country exports a lot of these goods to its neighbouring Asian countries, as well as the United States and Europe. 52 of the Fortune Global 500 companies are headquartered in Japan.
Currently, Japanese equities are considered to be relatively undervalued compared to US stocks. In 2023, the average Price-to-earnings ratio (P/E) of large-capitalisation Japanese companies is in the low twenties, comparable to Europe’s average. The average P/E for US equities is above the thirties.
Japan is not facing the same issues of persistent inflation and rising interest rates that have plagued Europe’s and the US stock markets. The Bank of Japan is traditionally dovish in its monetary policy, which is a positive for investors. Japan’s inflation rate is sitting at 3%, which is around the central bank's target level. The Bank of Japan is therefore not planning to raise interest rates any time soon, although there are no guarantees that this won't change in the future.
The Japanese yen has been one of the weakest currencies in 2023. Even during Japan’s lost decade, the yen proved to be surprisingly resilient in holding its value. This time, things are looking different. In 2022, the yen dropped to a record low in the last 24 years of 140 yen to the dollar, down from over 165 earlier that year.
This can be an issue for foreign investors looking to invest in Japan ETFs. When they are looking to cash out their potential gains, they must sell some of the Japanese stocks they own and convert the resulting yen back into dollars, euros, or pounds. If the yen continues to lose value, that will eat away at a foreign investor's profits from a Japanese equity portfolio. Some ETFs try to counteract this effect by hedging currencies.
Another important factor to consider before investing in Japan is that the country is suffering more and more from unfavourable demographics. Japan’s population is ageing rapidly, and the birth rate is at a low of 1.34. While shrinking populations are something all developed economies are dealing with to some extent, the issue is more pronounced in Japan.
When looking to buy into a fund, investors should pay attention to which currency the fund’s listing is in, as many Japan ETFs, including the ones listed above, have listings in multiple currencies. Moreover, when buying ETFs that invest heavily in foreign companies, investors should consider whether they prefer ETFs that hedge against currency risk.
Continue Reading:
- How to Trade the Japanese Stock Market
- Top 5 Best Japanese Stocks to Watch
- How to Trade the Japan NIKKEI 225 Index
- How to Trade Asia Markets
- What are ETFs? ETFs Explained
- How to Trade ETFs with €1,000
- The CFD Trading Guide
FAQs on Best Japan ETFs
What is the difference between MSCI Japan and Topix?
The Topix and MSCI Japan indexes are both market-capitalisation weighted and have over 99% correlation, making these two indexes very similar. However, the MSCI Japan is USD-hedged, while the Topix is GBP-hedged.
Does Vanguard have a Japan ETF?
Vanguard has several Japan ETFs on offer such as the Vanguard FTSE Japan UCITS ETF. This is a fund that tracks the FTSE Japan Index, an index comprising of large and medium capitalisation Japanese companies.
How to buy Japanese stocks in UK?
Japanese stocks can be bought in the UK through a stockbroker such as Admirals. Not all UK brokers will offer international stocks such as those from Japan so it's best to do your research.
What is the main index of Japanese equities?
A well-known index is the Nikkei 225, which tracks the 225 largest stocks in Japan. Other indexes are the Topix, MSCI Japan, and FTSE Japan Index.
Is Japan a good long-term investment?
As always with investing, nobody can foresee the future. Important gauges for whether a country’s economy makes for good long-term investing, however, are things like demographic developments, economic complexity, and import and export numbers, to name a few. Investors should perform their own research about which investments best fit their portfolio.
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