The Nikkei 225 Stock Average is Japan’s premier stock index and a barometer of the Japanese economy and stock market. It measures the performance of 225 large, publicly-owned companies in Japan from a wide array of industry sectors. In fact, it is considered Japan’s equivalent to the Dow Jones Industrial Average. It includes the top 225 blue-chip companies listed on the Tokyo Stock Exchange.
You cannot invest directly in an index. But if you are looking to gain exposure to the stocks the Nikkei 225 includes the best way is via an exchange-traded fund (ETF) that tracks the yen-denominated index.
The Nikkei 225 is not a textbook model of stock averages, which typically grow at a steady exponential rate. The average hit its all-time high at the peak of the Japanese asset price bubble on Dec. 29, 1989, On that day, the index reached an intra-day high of 38,957.44, before closing at 38,915.87, having grown sixfold during the decade. Subsequently, it lost nearly all these gains, closing at 7,054.98 on March 10, 2009 — 81.9% below its peak 20 years earlier.
On March 15, 2011, the second working day after the massive earthquake in the northeast part of Japan, the index dropped over 10% to finish at 8605.15, a loss of 1,015 points. The index dropped more throughout the whole year, bottoming out at 8160.01 on November 25, its lowest close since March 10, 2009. The Nikkei fell over 17% in 2011, finishing the year at 8455.35, its lowest year-end closing value in thirty years when the index finished at 8016.70 in 1982.
As of February 5, 2019, the Nikkei 225 was at 20,844.45.
Like the Dow Jones Industrial Average, the Nikkei 225 Stock Average is a price-weighted equity index. Ranking of companies is determined by stock price, which differs from other major indexes where market capitalization is used in calculations. Calculated since September of 1950 (retroactively to May of 1949), it is Asia’s oldest index and also commonly referred to as the Nikkei 225, Nikkei Index and the Nikkei.
The index is reviewed annually in September and if changes are made they are instituted in October.
Some of the most well-known brands in the world are companies included in the Nikkei 225. Canon Inc. (CAJ), Panasonic Corp. (PCRFY), Sony Corp. (SNE), Nissan Motor Co. (NSANY), Toyota Motor Corp. (TM), Mazda Motor Corp. (MZDAY) and Honda Motor Co. (HMC) are among them.
Stocks in the index fall under the following sectors: technology, financials, consumer goods, materials, capital goods/others, and transportation and utilities. In all, the index includes companies from 36 different industries.
Buying and managing each individual stock in the Nikkei 225 is not practical, not to mention the cost and tax implications. As an individual investor, you can gain exposure through exchanged-traded funds whose underlying assets correlate to the Nikkei 225. ETFs are essentially a basket of stocks that represent an underlying index.
Unlike mutual funds, which are priced at the end of the day, ETFs trade throughout the day. Their prices fluctuate like a stock's, essentially trading like a stock. Like mutual funds, ETFs offer diversification through one investment. They have lower expenses than actively managed funds.
Several ETFs tracking the Nikkei 225 trade on the Tokyo Stock Exchange. They include Blackrock Japan’s iShares Nikkei 225 ETF, Nomura Asset Management’s Nikkei 225 Exchange Traded Fund (NTETF) and Daiwa Asset Management’s Daiwa ETF Nikkei 225.
In order to trade these ETFs, you’d need to open an account with a brokerage that enables you to buy and sell investments not listed on a U.S. exchange. Fidelity Investments and E*Trade Financial Corp. (ETFC) are among the discount brokers that offer international trading accounts.
Keep in mind that trading ETFs in their local markets has its complications. Tokyo Stock Exchange-listed ETFs are denominated in yen. In addition to monitoring the performance of the Nikkei 225, you will also have to consider exchange rate fluctuations between the yen and dollar.
The United Kingdom, France, Germany, Switzerland, Italy, and Singapore also offer ETFs that track the Nikkei 225, some of which are cross-listed on the Tokyo Stock Exchange.
The Bottom Line
If you're looking to gain broad exposure to the Japanese stock market through investments whose underlying assets track the Nikkei 225, ETFs are the way to go, in particular, the U.S.-listed, dollar-denominated MAXIS Nikkei 225 Index ETF.