How to Invest in Japan with Japanese ETFs

Japan is a country with many large companies. Many Japanese companies are household names like Canon, Honda, Sony and Mitsubishi. Adding Japanese ETFs is a good way to add global funds to your portfolio.

Japan is currently the third largest economy in the world, with China recently overtaking them for the second largest. Is not the time to invest in Japan? Last year was a good year for Japanese stocks. Many fund investors think that with new leadership in Japan, this could be a good time to invest in Japan.

Large Cap Japanese ETFs

Large cap ETFs are defined by the stocks they hold. If they invest in companies that are considered large cap, they are then a large cap ETF. A large cap company will have approximately $10 billion or more market capitalization. Capitalization is the stock price times the outstanding number of shares. Many of the large cap Japanese companies are household names like Sony, Mitsubishi, Honda, Toyota and Canon.

• iShares MSCI Japan Index (EWJ) is by far the largest and most traded Japanese ETF. This ETF invests in over 300 different Japanese companies and 85% are the large cap stocks.
• WisdomTree Japan Hedge Equity (DXJ) has its portfolio in large cap Japanese stocks that also pay dividends. This Japanese ETF is different when compared to most others as it also hedges the currency fluctuations between the yen and the US dollar. When buying foreign stocks even through an ETF the difference between your currency and in this case the yen can affect the gains of an ETF.
• iShares S&P TOPIX 150 Index (ITF) is another large Japanese ETF that at this time is invested in 150 large cap companies.
• SPDR Russell Nomura PRIME Japan (JPP) invests in large cap Japanese companies and at this time holds over 300 stocks.
• ProShares Ultra MSCI Japan (EZJ): This fund seeks 200% or twice the daily performance of the MSCI Japan Index.

Small Cap Japanese ETFs

These Japanese ETFs invest primarily in companies that are considered small cap. Small cap companies are usually the up and coming growth companies. Small cap companies have between $300 million and $2 billion of capitalization.

• iShares MSCI Japan Small Cap Index (SCJ) is rated 4 stars by Morningstar with an expense ratio of .53%. This Japanese ETF invests in small cap companies like Ebara, Dainippon Screen Mfg, Alps Electric and MISUMI Group.
• WisdomTree Japan Small Cap Dividend (DFJ) invests in over 350 small to mid cap companies including Kyorin Holdings, Park24 Company, Circle K Sunkus and Century Tokyo Leasing. DFJ is rated 4 stars by Morningstar with an expense ratio of .58%.
• SPDR Russell Nomura Small Cap Japan (JSC) has an expense ratio of .55% and is also rated 4 stars. JSC invests in almost 400 Japanese small cap companies like Kaken Pharmaceuticals, Lintec Corp, Awa Bk, Mos Food Services and Iwatani.

Shorting Japanese Stocks

If you feel the Japanese stock market will trade lower, you can buy an ETF that shorts Japanese stocks.

• ProShares UltraShort MSCI Japan (EWV) is an ETF that seeks daily results that are twice the inverse or opposite of the MSCI Japan Index. These types of funds can be volatile and should be watched daily.

Japanese Yen ETFs

If you are interested in currency ETFs or investing in or shorting the yen, there are several Japanese ETFs for this. Currency speculation can be very risky and volatile; it is best left for those who completely understand foreign currency as it relates to the US dollar or your own currency.

• ProShares Ultra Yen (YCL) seeks daily results that correspond to twice (200%) the US dollar price of the yen.
• CurrencyShares Japanese Yen Trust (FXY) tracks the price of the yen.
• ProShares UltraShort Yen (YCS) seeks daily results that are twice (200%) the inverse or opposite of the US dollar price of the yen. If you feel the yen will drop, you could trade this ETF.
• iPath Japanese Yen/US dollar Exchange Rate ETN (JYN) has very low volume.

Make sure you read and understand these funds before investing or trading in them.

Conclusion

When investing in Japanese ETFs or any foreign ETF, it is important to keep in mind the relationship between the foreign currency and your own currency. All of the Japanese ETFs except DXJ price the Japanese stocks in US dollars. If the yen weakens it could cause these Japanese ETFs for drop in price. For this reason, DXJ is a good Japanese ETF to consider.

Copyright © April 2011 Sam Montana