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Best ETFs For Japan

by Steven Brown
Best ETFs For Japan

Japan’s stock market is one of the world’s largest and consists of a mix of large and small companies. If you’re looking for an easy way to add Japanese equities to your portfolio, exchange-traded funds (ETFs) offer an attractive means of diversifying risk.

Several of these Japanese-focused funds have enjoyed strong year-to-date inflows this year and are worth considering for your portfolio.

Franklin FTSE Japan ETF

With Japan reopening its doors this year, the country’s stock market should experience a boost. But the reopening is no guarantee of market growth, and there are risks to investing in Japanese markets.

The Franklin FTSE Japan ETF (FLJH) invests in large- and mid-cap stocks of companies operating across diversified sectors in Japan. It tracks a market-cap-selected and -weighted index, which includes a capping methodology to limit overconcentration in any single security.

While Japanese equities have performed well this year, they are also susceptible to political risk and currency fluctuations. A weaker yen could benefit exporters, but it’s likely to weigh on the real estate sector and other non-core businesses.

To minimize currency exposure, the Fund attempts to hedge its foreign currency denominated securities using foreign currency forward contracts and currency futures contracts. This approach is designed to reduce volatility, but the actual return of the currency hedge may not offset the currency’s fluctuations.

JPMorgan Betabuilders Japan ETF

The JPMorgan Betabuilders Japan ETF (BBJP) tracks a diversified index of large and mid-cap Japanese companies. Its management fee is well below average for the category, and is lower than the iShares MSCI Japan ETF (EWJ), long the dominant fund in the space.

BBJP is a member of the JPMorgan BetaBuilders family, which uses a passive investment approach to help investors build portfolios that closely correspond to an underlying index. The funds use a market cap-weighted benchmark to identify securities that are generally considered undervalued or overvalued, and the funds attempt to generate returns that closely match the underlying index.

BBJP is primarily focused on Japanese large-cap stocks, which typically offer higher dividend yields than smaller companies and tend to be more stable. The portfolio consists of a mix of industrial, consumer goods and IT stocks. The largest holdings are Toyota, Sony and Softbank Group Corp. The investment seeks to invest at least 80% of its assets in securities included in the underlying index.

iShares MSCI Japan ETF

There are a number of exchange-traded funds (ETFs) that offer exposure to Japanese stocks, but iShares MSCI Japan ETF stands out as the oldest and largest of them all. Launched in March 1996, EWJ has a massive $16 billion in assets under management and is one of the biggest single-country funds available in the U.S.

The iShares MSCI Japan ETF is an exchange-traded fund that tracks the performance of a market-cap-weighted index. It offers broad exposure to Japanese stocks while avoiding the lowest 15% of companies by market cap.

It’s a good choice for investors looking to capitalize on the economic heft of Japan and its potential for long-term growth. However, it’s not a perfect fit for every investor.

If you’re looking for a Japan-focused ETF with less currency risk, try the WisdomTree Japan Hedged Equity ETF instead. This ETF tracks the performance of the Tokyo Stock Exchange TOPIX index and has less currency exposure, which is great for investors who don’t want to take on currency risks.

WisdomTree Japan Hedged Equity ETF

If you’re looking for a currency-hedged ETF for Japan, look no further than WisdomTree Japan Hedged Equity ETF (DXJ). The Fund tracks an exporter-focused, dividend-weighted index of Japanese stocks.

It’s hedged against currency risk through a combination of hedging strategies and selling one-month forward currency contracts. When the yen is depreciating relative to the dollar, DXJ’s strategy can help insulate investors from fluctuations in the currency.

The Fund also focuses its investments in Japan, which makes it more vulnerable to economic and political changes in that country. However, the Government of Japan has been supporting the economy by offering cash handouts, employment protection subsidies, and other forms of stimulus to support corporate growth and investment.

The Fund’s top holdings include Toyota Motor Corp, which carries a 5.25% dividend yield, and Japan Tobacco Inc., which pays a 4.91% yield. Both of these companies have strong balance sheets, low debt levels, and positive outlooks.

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