Exchange-traded funds (ETFs) focused on Japan provide investors with exposure to the country's economic growth and business profits. Japan has one of the largest economies in the world, despite having suffered a financial crisis in 1991, a subsequent "lost decade" of sluggish growth, and continued struggles with deflationary pressures. The country is home to some large, well-known multinational corporations, including Toyota Motor Corp. (TM), Honda Motor Co. (HMC), and Sony Corp. (SNE). Japan ETFs offer investors the opportunity to profit from the growth of these businesses, as well as many other companies.

Key Takeaways

  • Japanese stocks underperformed the broad U.S. equity market over the past year.
  • The ETFs with the best 1-year trailing total return are DBJP, HEWJ, and FLJP.
  • The top holding of the first and third of these ETFs is Toyota, and the top holding of the second is the iShares MSCI Japan ETF.

There are about 12 distinct Japan ETFs, excluding inverse and leveraged ETFs as well as funds with less than $50 million in assets under management (AUM). Japanese equities, as measured by the MSCI Japan Index, have underperformed the broad U.S. equity market with a total return of 10.8% over the past 12 months compared to the S&P 500's total return of 24.8%, as of September 2, 2020. The best-performing Japan ETF for Q4 2020, based on performance over the past year, is the Xtrackers MSCI Japan Currency-Hedged Equity Fund (DBJP). We examine the top 3 Japan ETFs below. All numbers below are as of September 3, 2020.

Xtrackers MSCI Japan Currency-Hedged Equity Fund (DBJP)

  • Performance over 1-Year: 12.6%
  • Expense Ratio: 0.45%
  • Annual Dividend Yield: 2.85%
  • 3-Month Average Daily Volume: 39,447
  • Assets Under Management: $212.2 million
  • Inception Date: June 9, 2011
  • Issuer: DWS

DBJP tracks the MSCI Japan U.S. Dollar Hedged Index, an index providing currency-hedged exposure to Japanese equity markets. The ETF is focused on large-cap Japanese equities in both growth and value categories. Like its index, the fund provides a hedge against fluctuations in the exchange rate between the two countries' currencies. That means investors don't have to worry about gains in Japanese equities potentially being cancelled out by adverse movements in the exchange rate. The fund's top three holdings include Toyota, a multinational automobile manufacturer; Nintendo Co. Ltd. (7974), a multinational consumer electronics and video game company; and SoftBank Group Corp. (9984), a multinational holding company primarily engaged in the telecommunications industry.

iShares Currency Hedged MSCI Japan ETF (HEWJ)

  • Performance over 1-Year: 12.2%
  • Expense Ratio: 0.49%
  • Annual Dividend Yield: 2.22%
  • 3-Month Average Daily Volume: 133,564
  • Assets Under Management: $267.0 million
  • Inception Date: January 31, 2014
  • Issuer: iShares

HEWJ tracks the MSCI Japan 100% Hedged to USD Index, an index composed of large- and mid-cap Japanese equities and which also mitigates against fluctuations in the exchange rate between the Japanese yen and U.S. dollar. The ETF offers exposure to both growth and value stocks of Japanese companies. It uses various forward contracts in order to hedge against exchange-rate movements. The fund's main holding, with a 99.8% portfolio weighting, is another ETF, the iShares MSCI Japan ETF (EWJ). In essence, the HEWJ is equivalent to the EWJ except with the added feature of currency hedging. Its top holdings include Toyota; Sony, a multinational electronics and entertainment company; and SoftBank. 

Franklin FTSE Japan ETF (FLJP)

  • Performance over 1-Year: 12.0%
  • Expense Ratio: 0.09%
  • Annual Dividend Yield: 1.98%
  • 3-Month Average Daily Volume: 77,876
  • Assets Under Management: $417.6 million
  • Inception Date: November 2, 2017
  • Issuer: Franklin Templeton Investments

FLJP tracks the FTSE Japan Capped Index, which provides exposure to large- and mid-cap Japanese equities. The ETF is focused on the mid-to-large-cap segment of the Japanese equity market. It follows a blended strategy, investing in a mix of both value and growth stocks. The fund's top three holdings are Toyota, SoftBank, and Sony.