Exchange-traded funds (ETFs) focused on Japan provide investors with exposure to the country’s economic growth and business profits. As of the most recent data available from the World Bank in 2020, Japan remains the third-largest economy in the world as measured by GDP. This is in spite of the nation’s a financial crisis in 1991, a subsequent “lost decade” of sluggish growth, and the economic disruption caused by the COVID-19 pandemic. Japan’s GDP fell 4.8% in 2020. Japanese Prime Minister Fumio Kishida’s ruling Liberal Democratic Party won a solid majority in parliamentary elections on Oct. 31, 2021, giving him freedom to expand stimulus to bolster the economy.
The country is home to many large, well-known multinational corporations, including Honda Motor Co. (HMC) and Sony Group Corp. (SONY). Japan ETFs offer investors the opportunity to profit from the growth of these businesses and many other companies.
Key Takeaways
- Japanese stocks underperformed the broader U.S. equity market over the past year.
- The Japan exchange-traded funds (ETFs) with the best one-year trailing total returns are DXJ, HEWJ, and DBJP.
- The top holding of the first and last of these ETFs is Toyota Motor Corp., and the top holding of the second is shares of the iShares MSCI Japan ETF.
There are 10 distinct Japan ETFs that trade in the U.S., excluding inverse and leveraged ETFs as well as funds with less than $50 million in assets under management (AUM). These ETFs solely hold stocks of domestic companies rather than corporate debt or Japanese government bonds. The iShares MSCI Intl Value Factor ETF (IVLU) is included in some screens of Japan ETFs but is not specifically focused on Japanese holdings, so is not included in our list.
Japanese equities, as measured by the MSCI Japan Index, have underperformed the broader U.S. equity market over the past 12 months, with a total return of 18.1% compared to the S&P 500’s total return of 41.2%, as of Oct. 29, 2021. The best-performing Japan ETF, based on performance over the past year, is the WisdomTree Japan Hedged Equity Fund (DXJ).
We examine the best three Japan ETFs below. All numbers below are as of Oct. 28, 2021.
- Performance Over One-Year: 34.5%
- Expense Ratio: 0.48%
- Annual Dividend Yield: 2.11%
- Three-Month Average Daily Volume: 394,489
- Assets Under Management: $1.9 billion
- Inception Date: June 16, 2006
- Issuer: WisdomTree
DXJ tracks the WisdomTree Japan Hedged Equity Index, which seeks to provide exposure to Japanese equities while also neutralizing the impact of fluctuations in the relative values of the Japanese yen and the U.S. dollar. The ETF focuses on Japanese companies that pay dividends, with a preference for exporters. The fund also employs the currency-hedging strategy used by its index to strip out the impact of changes in the yen’s value. This makes the ETF an attractive option for investors who think the yen may weaken against the dollar but still want exposure to Japan’s equity market.
DXJ’s largest exposure is in the industrial sector, followed by consumer discretionary and financials. It uses a blended strategy, investing in a mix of both value and growth stocks of mostly large-cap companies. The fund’s top three holdings are Toyota Motor Corp. (7203:TKS), a global automobile manufacturer; Mitsubishi UFJ Financial Group Inc. (8306:TKS), a global financial services holding company; and Sumitomo Mitsui Financial Group Inc. (8316:TKS), a multinational banking and financial services company.
- Performance Over One-Year: 30.0%
- Expense Ratio: 0.51%
- Annual Dividend Yield: 1.04%
- Three-Month Average Daily Volume: 84,479
- Assets Under Management: $584.3 million
- Inception Date: Jan. 31, 2014
- Issuer: BlackRock Financial Management
HEWJ tracks the MSCI Japan 100% Hedged to USD Index, an index composed of mid- and large-cap Japanese companies that reduces the impact of fluctuations between the value of the yen and the value of the dollar. The ETF provides broad exposure to a range of Japanese equities. The industrials sector receives the highest allocation within the fund, followed by the consumer discretionary and information technology sectors. Like its index, HEWJ employs a currency-hedging strategy to mitigate exposure to relative value fluctuations in the yen. It also follows a blended strategy, investing in both growth and value stocks of primarily large-cap equities.
The fund does not invest in individual equities itself. It provides exposure to them by investing in the iShares MSCI Japan ETF (EWJ) and utilizes various derivatives to provide the currency hedge. The top three holdings of EWJ are Toyota Motor Corp., described above; Sony Group Corp. (6758:TKS), a multinational manufacturer and distributor of electronics products; and Keyence Corp. (6861:TKS), a manufacturer of industrial automation and inspection equipment.
- Performance Over One-Year: 29.9%
- Expense Ratio: 0.46%
- Annual Dividend Yield: 2.29%
- Three-Month Average Daily Volume: 10,352
- Assets Under Management: $200.0 million
- Inception Date: June 9, 2011
- Issuer: Deutsche Bank
DBJP tracks the MSCI Japan US Dollar Hedged Index, which represents a currency-hedged approximation of the performance of the MSCI Japan Index. The ETF provides exposure to the Japanese equity market while stripping out the impact of currency fluctuations between the yen and the dollar. That means that U.S. investors can generate U.S. dollar profits on gains in the Japanese equity market without having to worry about changes in the value of the yen.
DBJP’s largest sectoral exposure is in industrials, followed by consumer discretionary and information technology. It follows a blended strategy of investing in both growth and value stocks of primarily large-cap companies.
The fund’s top three holdings are Toyota Motor Corp., Sony Group Corp., and Keyence Corp.
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