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ETFs to Tap the Surge in Japan Stocks

Japan stocks have been outperforming, with the country’s Topix benchmark climbing to its highest since 1990 and Nikkei 225 rising to the highest close in 16 months. A slew of robust corporate earnings, foreign buying, steady BOJ policy, a weaker yen and increased buybacks have boosted investors’ sentiment in Japan’s stocks, with most analysts turning bullish on the world’s third-largest economy.

Investors seeking to tap the potential rally should definitely invest in Japan ETFs. While most ETFs have been delivering handsome returns this year, we have highlighted the popular ones that are crushing the broad market fund SPY from a year-to-date look. These include iShares MSCI Japan ETF EWJ, JPMorgan BetaBuilders Japan ETF BBJP, WisdomTree Japan Hedged Equity Fund DXJ, Franklin FTSE Japan ETF FLJP and Xtrackers MSCI Japan Hedged Equity ETF DBJP. All these funds have a favorable Zacks ETF Rank #3 (Hold) (see: all Developed Asia-Pacific ETFs here).

Solid Trends

The Nikkei 225 Stock Average is Asia’s best-performing major benchmark for 2023. The outperformance is expected to continue as the economy has rebounded strongly after fully reopening in the second half of last year. Both business and service activities are growing this year thanks to the strength in consumer spending and the reopening of borders. The labor market remains relatively tight, and wages are expected to accelerate this year.

Bank of Japan is maintaining its accommodative policy stance and expects inflation to ease in the second half of this year. A weaker yen is boosting sentiment in the exporter-heavy market, driving the rally in Japan’s stocks.

Strategists at Goldman Sachs cited solid fundamentals and expectations for structural changes that “justify a bullish stance” on the nation’s equities. Factors including an inbound recovery, plans for robust capital expenditure and ongoing monetary easing at the Bank of Japan have brightened the economic outlook for Japan. In addition, companies are announcing solid earnings, valuations are cheap and long-term investors are positioned in the market, per a Goldman analyst.

According to John Vail, chief global strategist at Nikko Asset Management Co., domestic and foreign investors are positive about Japan relative to the United States and Europe, as it does not face an imminent recession and yet has very low valuations. Fabiana Fedeli, chief investment officer for equities and multi assets at M&G Plc, believes that Japan’s stocks have more room to run. “Companies in Japan were improving their balance sheets and were giving back to shareholders in terms of buybacks and dividends,” Fabiana Fedeli cited (read: ETFs to Win/Lose on Reduced Buybacks).

Further, Warren Buffett’s renewed endorsement of Japanese stocks has provided hope that foreign investment is returning. Overseas traders bought a net $22 billion worth of the nation’s stocks and futures in April, amid record levels of inflows.

iShares MSCI Japan ETF (EWJ)

iShares MSCI Japan ETF provides exposure to large and mid-sized companies in Japan by tracking the MSCI Japan Index. It holds 237 stocks in its basket, with none accounting for more than 4.5% of assets. iShares MSCI Japan ETF is tilted toward the industrial sector at 22.6% share, while consumer discretionary, information technology and financials round off the next three spots with double-digit exposure each.

iShares MSCI Japan ETF has AUM of $10.4 billion and charges 50 bps in annual fees. It trades in a volume of 5.7 million shares a day on average. EWJ has returned 10.6% so far this year (read: Follow Buffett and Munger With These ETFs).

JPMorgan BetaBuilders Japan ETF (BBJP)

JPMorgan BetaBuilders Japan ETF follows the Morningstar Japan Target Market Exposure Index, which is a free-float adjusted market-cap weighted index consisting of stocks traded primarily on the Tokyo and Nagoya Stock Exchanges. It holds 273 stocks in its basket, with each making up for less than 5% share. Industrials and consumer discretionary take the largest allocation in terms of sector exposure, with 25.9% and 23.8%, respectively.

JPMorgan BetaBuilders Japan ETF has amassed $7.6 million in its asset base while trading in a lower volume of 313,000 shares a day on average. It charges 19 bps in annual fees and has gained 10.8% this year.

WisdomTree Japan Hedged Equity Fund (DXJ)

With AUM of $1.7 billion, WisdomTree Japan Hedged Equity Fund seeks to provide exposure to the Japanese equity market while hedging exposure to fluctuations between the U.S. dollar and the yen. It targets the Japanese equity stock market without the currency risk by tracking the WisdomTree Japan Hedged Equity Index.

WisdomTree Japan Hedged Equity Fund trades in a good average daily volume of 215,000 shares and charges 48 bps in annual fees. It has soared 16.7% this year (read: Japan Currency Hedged ETF Hits New 52-Week High).

Franklin FTSE Japan ETF (FLJP)

Franklin FTSE Japan ETF provides targeted exposure to large- and mid-sized companies in Asia's largest stock market. It follows the FTSE Japan RIC Capped Index and holds 514 stocks in its basket, with each accounting for no more than 4.3% of total assets. Industrials is the top sector accounting for a 22.9% share, followed by consumer discretionary (18.3%), information technology (12.6%) and financials (10.6%).

Franklin FTSE Japan ETF has AUM of $1.1 million and charges 9 bps in annual fees. It trades in average daily volume of 177,000 shares and has risen 10.5% this year.

Xtrackers MSCI Japan Hedged Equity ETF (DBJP)

Xtrackers MSCI Japan Hedged Equity ETF tracks the MSCI Japan U.S. Dollar Hedged Index, which is designed to provide exposure to Japanese equity markets, while at the same time mitigating exposure to fluctuations between the value of the U.S. dollar and Japanese yen.

With AUM of $270.8 million, Xtrackers MSCI Japan Hedged Equity ETF trades in an average daily volume of 15,000 shares and charges 45 bps in fees per year.


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SPDR S&P 500 ETF (SPY): ETF Research Reports

iShares MSCI Japan ETF (EWJ): ETF Research Reports

WisdomTree Japan Hedged Equity ETF (DXJ): ETF Research Reports

Xtrackers MSCI Japan Hedged Equity ETF (DBJP): ETF Research Reports

Franklin FTSE Japan ETF (FLJP): ETF Research Reports

JPMorgan BetaBuilders Japan ETF (BBJP): ETF Research Reports

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