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Japan has the third-largest economy after the United States and China. It is a major export of automobiles, consumer electronics, semiconductors, and several natural resources.
If you’re looking to invest in Japan’s productivity, you’re in the right place. This article examines the best Japan ETFs for 2022 by comparing their advantages and disadvantages to one another.
Best Japan ETFs
Here are the best thematic Japan ETFs for 2022:
- iShares MSCI Japan ETF (EWJ)
- iShares Currency Hedged MSCI Japan ETF (HEWJ)
- JPMorgan BetaBuilders Japan ETF (BBJP)
- WisdomTree Japan Hedged Equity Fund (DXJ)
- WisdomTree Japan SmallCap Dividend Fund (DFJ)
Let’s take a closer look.
#1. iShares MSCI Japan ETF (EWJ)
- 1-Year Performance: -1%
- Expense Ratio: 0.50%
- Annual Dividend Yield: 1.10%
- AUM: $11.8 billion
- Number of Holdings: 261
- Inception Date: 1996
The iShares MSCI Japan ETF (EWJ) is the largest Japan ETF by assets under management.
This is BlackRock’s flagship Japan ETF. It offers a handful of other Japan funds, but the most value has accrued to EWJ, most likely due to its diversification.
The iShares MSCI Japan ETF invests in 261 companies across all 11 industries of the economy.
It primarily invests in large- and mid-cap stocks in the Industrials, Consumer Discretionary, and Information Technology sectors, allocating 22%, 19%, and 16%, respectively.
EWJ’s top holdings are well-known companies, including Toyota, Sony, and Mitsubishi.
This fund absorbs the majority of US capital that’s looking for exposure to Japan, but it has one major downside: it doesn’t account for currency fluctuations between the Japanese yen and the US dollar.
Thankfully, and conveniently, BlackRock created another Japan ETF that does exactly that, which we will explore next.
EWJ Top Holdings:
- Toyota Motor Corp. (7203:TKS) 5.70%
- Sony Group Corp. (6758:TKS) 4.00%
- Keyence Corp. (6861:TKS) 2.76%
- Tokyo Electron (8035:TKS) 2.15%
- Mitsubishi UFJ Financial Group (8306:TKS) 1.94%
#2. iShares Currency Hedged MSCI Japan ETF (HEWJ)
- 1-Year Performance: +8%
- Expense Ratio: 0.50%
- Annual Dividend Yield: 1.02%
- AUM: $750 million
- Number of Holdings: 3
- Inception Date: 2014
The iShares Currency Hedged MSCI Japan ETF (HEWJ) provides exposure to large- and mid-cap Japanese equities while “mitigating exposure to fluctuations between the value of the Japanese yen and the US dollar.
BlackRock created this hedged counterpart about 18 years after launching the unhedged EWJ.
HEWJ and EWJ have the same exact equity holdings, but the hedged fund holds several JPY/USD exchange pairs, in addition to a BlackRock treasury fund, to reduce the impact of the Yen relative to the US dollar.
And it does a good job of it. The Japanese Yen has weakened 9.25%over the last year relative to the dollar.
This is consistent with the performance arbitrage between EWJ and HEWJ over the same time frame, where EWJ is down 1%, and HEWJ is up 8%.
When the JPY is stronger than the dollar, you can expect the unhedged EWJ to perform better than the hedged HEWJ.
Below is the all-time chartbetween the two, where HEWJ is yellow, and EWJ is blue.
You must factor in the strength of each respective currency when choosing between these two funds.
If that’s a component you’d rather not consider and are fine with paying additional fees, consider owning both to curtail the currency risk.
HEWJ Top Holdings:
- iShares MSCI Japan ETF (EWJ) 99.95
- BlackRock Cash Funds Treasury (SL Agency Shares) 0.05%
- JPY/USD Pairs
#3. JPMorgan BetaBuilders Japan ETF (BBJP)
- 1-Year Performance: -2%
- Expense Ratio: 0.19%
- Annual Dividend Yield: 0.54%
- AUM: $7.9 billion
- Number of Holdings: 304
- Inception Date: 2018
The JPMorgan BetaBuilders Japan ETF launched in 2018 and is the second-largest Japan ETF by assets under management.
It has very similar core holdings and sector allocations as the iShares MSCI Japan ETF (EWJ), with Toyota, Sony, and Keyence as primary holdings, and Industrials (23%), Consumer Discretionary (20%), and Information Technology (14%) as core sectors.
Also, both funds have a bias towards large- and mid-cap companies.
The difference between these two ETFs is their expense ratios. The iShares MSCI Japan ETF charges a 0.50% expense ratio, while the JPMorgan BetaBuilders Japan ETF charges just 0.19% for essentially the same fund.
BBJP launched 22 years after EWJ but has made great progress catching up to it.
Competitively pricing the expense ratio is one of the fastest ways to close the gap, which it appears to have successfully done.
BBJP Top Holdings:
- Toyota Motor Corp. (7203:TKS) 6.13%
- Sony Group Corp. (6758:TKS) 3.54%
- Keyence Corp. (6861:TKS) 2.41%
- Recruit Holdings Co., Ltd. (6098:TKS) 2.10%
- Tokyo Electron (8035:TKS) 2.00%
#4. WisdomTree Japan Hedged Equity Fund (DXJ)
- 1-Year Performance: +17%
- Expense Ratio: 0.48%
- Annual Dividend Yield: 2.11%
- AUM: $2.1 billion
- Number of Holdings: 417
The WisdomTree Japan Hedged Equity Fund provides broad equity exposure to Japanese dividend-paying companies with an exporter tilt.
The fund implements a currency hedge to mitigate fluctuations in the Japanese yen, much like the iShares Currency Hedged MSCI Japan ETF (HEWJ).
However, this is the first Japan ETF we’ve covered that has slightly different holdings than the field, given WisdomTree’s focus on “dividend-paying companies.”
For example, there is a larger presence of Financial companies in DXJ than EWJ, HEWJ, and BBJP.
Japan Tobacco is a primary holding in DXJ, a company with a high dividend yield of 5.89%, which brings us to our next point.
DXJ’s dividend yield is far greater than that offered by EWJ, HEWJ, and BBJP, paying out 2.11% of its share price annually.
This ETF’s focus on stable Japanese companies may have contributed to its impressive performance relative to the other Japan funds over the last year.
DXJ Top Holdings:
- Toyota Motor Corp. (7203:TKS) 5.81%
- Japan Tobacco (2914:TKS) 4.56%
- Mitsubishi UFJ Financial Group (8306:TKS) 4.07%
- Sumitomo Mitsui Financial Group (8316:TKS) 3.12%
- Takeda Pharmaceutical Co. Ltd. (4502:TKS) 3.11%
#5. WisdomTree Japan SmallCap Dividend Fund (DFJ)
- 1-Year Performance: -1%
- Expense Ratio: 0.58%
- Annual Dividend Yield: 2.28%
- AUM: $224 million
- Number of Holdings: 712
The WisdomTree Japan SmallCap Dividend Fund does exactly that: it invests in Japanese small-cap equities that pay a respectable dividend.
There are +700 holdings in DFJ, with small-caps accounting for 75% of assets and micro-caps making up the rest.
Considering there are +700 holdings, and the top holding accounts for just 0.81% of the fund, you can expect to receive adequate diversification across small-cap equities with DFJ.
DFJ provides more exposure to the Materials (15%) and Financials (13%) sectors of the Japanese economy while maintaining healthy allocations to the core group of Industrials, Consumer Discretionary, and Information Technology that we’ve found in the other funds.
DFJ’s 2.28% dividend yield is slightly higher than the other WisdomTree ETF that we just discussed, the WisdomTree Japan Hedged Equity Fund (DXJ).
The deal-breaker here is size; DFJ is better suited than DXJ if you’re seeking small-cap value exposure.
DFJ Top Holdings:
- Nishimatsu Construction Co., Ltd. (1820:TKS) 0.81%
- Aozora Bank (8304:TKS) 0.76%
- Mebuki Financial Group (7167:TKS) 0.70%
- Konica Minolta, Inc. (4902:TKS) 0.68%
- Toyo Seikan Group Holdings (5901:TKS) 0.63%
Other Japan ETFs to Consider
There are over 10 distinct Japan ETFs that trade in the United States. Most provide some form of general exposure, but others are more narrowly constructed to target a specific type of Japanese stock, sometimes with leverage.
Here are some other Japan ETFs to consider:
- iShares MSCI International Value Factor ETF (IVLU)
- Franklin FTSE Japan ETF (FLJP)
- Xtrackers MSCI Japan Hedged Equity ETF (DBJP)
- Invesco Currencyshares Japanese Yen Trust (FXY)
- iShares JPX-Nikkei 400 ETF (JPXN)
- iShares MSCI Japan Value ETF (EWJV)
- iShares MSCI Small-Cap ETF (SCJ)
- WisdomTree Japan Hedged SmallCap Equity Fund (DXJS)
- ProShares UltraShort Yen (YCS)
- ProShares Ultra MSCI Japan (EZJ)
BlackRock offers eight different Japan ETFs through iShares. It may be inefficient to own more than one of their funds from a fee perspective.
Also, the two ProShares ETFs use leverage to deliver 2x the return of the benchmark they follow.
This potential reward comes with a unique set of risks that investors should know before investing in one of these funds.
Japan ETFs: Frequently Asked Questions
What is the best investment in Japan?
The best investment in Japan depends on your investing goals and risk-to-reward profile. However, many of the top Japan ETFs allocate substantial assets to Toyota, Sony, Mitsubishi, and Keyence.
Does Vanguard have a Japanese ETF?
The Vanguard Japan Stock Index Fund tracks the performance of the MSCI Japan Index. It was created in 2003 and has amassed $5+ billion in AUM. However, it requires a minimum initial investment of $1,000,000.
Does Japan have ETFs?
There are several Japan ETFs that are listed on US exchanges, such as the iShares MSCI Japan ETF (EWJ), iShares Currency Hedged MSCI Japan ETF (HEWJ), JPMorgan BetaBuilders Japan ETF (BBJP), WisdomTree Japan Hedged Equity Fund (DXJ), and WisdomTree Japan SmallCap Dividend Fund (DFJ). These ETFs tend to have higher fees because they provide international exposure.
Bottom Line: Best Japan ETFs
International exchange-traded funds offer a relatively cheap way to gain portfolio exposure to economies all over the globe.
Now, you’re familiar with your best options when it comes to Japan. Good luck out there.
This article is for informational purposes only, and it is not intended to be investment advice. Read our editorial guidelines and public equities research methodology to learn more about how we selected the Best Japan ETFs.