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 2021, Japan remains the third-largest economy in the world as measured by gross domestic product (GDP).
Japan's economy suffered a major contraction during the COVID-19 pandemic but it is showing signs of recovery. The country's economy grew by 2.2% in Q2 2022, driven by increases in domestic consumption of goods and services.The International Monetary Fund forecasts that Japan's GDP will grow 2.4% for all of 2022.
The country is home to many large, well-known multinational corporations, including Honda Motor Co. Ltd. (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.
- Toyota Motor Corp. is the top holding of the first and third of these funds, while the top holding of the second is shares of the iShares MSCI Japan ETF.
There are 11 distinct Japan ETFs that trade in the United States, 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 it 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 -13.0% compared with the S&P 500’s total return of -2.5%, as of Aug. 17, 2022. 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 Aug. 18, 2022. In order to focus on the funds' investment strategy, the top holdings listed for each ETF exclude cash holdings and holdings purchased with securities lending proceeds except under unusual cases, such as when the cash portion is exceptionally large.
WisdomTree Japan Hedged Equity Fund (DXJ)
- Performance over one-year: 13.7%
- Expense ratio: 0.48%
- Annual dividend yield: 2.11%
- Three-month average daily volume: 651,039
- AUM: $2.0 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 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 want exposure to Japan's equity market even when the yen is weakening against the dollar. The yen has continued to weaken against the U.S. dollar this year.
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 growth and value stocks of mostly large-cap companies. The fund’s top three holdings are Toyota Motor Corp. (7203:TKS), a global automobile manufacturer; Japan Tobacco Inc. (2914:TKS), a cigarette manufacturer; and Mitsubishi UFJ Financial Group Inc. (8306:TKS), a global financial services holding company.
iShares Currency Hedged MSCI Japan ETF (HEWJ)
- Performance over one-year: 7.9%
- Expense ratio: 0.50%
- Annual dividend yield: 1.02%
- Three-month average daily volume: 232,692
- AUM: $537.9 million
- Inception date: Jan. 31, 2014
- Issuer: BlackRock Financial Management
HEWJ seeks to track the MSCI Japan 100% Hedged to USD Index. The index is composed of large- and mid-cap Japanese equities and strives to mitigate exposure to fluctuations between the value of the Japanese yen and the U.S. dollar. It is the hedged version of the iShares MSCI Japan ETF (EWJ), another popular Japan-focused fund. Industrials, consumer discretionary, and information technology stocks are the three largest portions of the portfolio.
HEWJ's primary holding is shares of EWJ, with over 99.9% of HEWJ's portfolio consisting of EWJ shares. A very small portion of the portfolio is also given over to BlackRock Cash Funds Treasury SL Agency Shares. The top three holdings of EWJ include Toyota Motor Corp.; Sony Group Corp. (6758:TKS), a manufacturer and distributor of electronics products; and Keyence Corp. (6861:TKS), a manufacturer of industrial automation and inspection equipment.
Xtrackers MSCI Japan Hedged Equity ETF (DBJP)
- Performance over one-year: 7.4%
- Expense ratio: 0.45%
- Annual dividend yield: 2.29%
- Three-month average daily volume: 13,337
- AUM: $204.4 million
- Inception date: June 9, 2011
- Issuer: DWS
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 have the potential to 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; Sony Group; and Keyence.
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