Eric Dutram: Although the country is largely overshadowed by China, Japan is still an economic force. The nation is #3 in terms of total GDP from a national perspective by most accounts, easily edging out all of the major Western European economic powers.
For this reason, as well as the nation’s incredible export prowess and deep level of savings, the economy of Japan cannot be ignored by most investors. Furthermore, due to its location and domination of production in a variety of consumer goods, the country can also be a safer play on emerging Asia, especially as these nations see more of their citizens reach the middle class and are able to purchase more consumer goods.
In terms of gaining exposure to the country, there are a few major Japanese corporations that can easily be purchased via the NYSE. However, these firms are few and far between and tend to be the ultra-large corporations in the electronics or automotive sectors. So for those looking for more diversified Japanese exposure, an ETF approach must be taken (read Japan ETFs: One Year After The Fukushima Disaster).
Japan ETFs in Focus
Currently, there are a dozen Japanese equity ETFs currently trading in the U.S. market. While there are a handful that are relatively specialized, either tracking small cap benchmarks or dividend focused indexes, the most popular target the broad markets.
Of these, the lion’s share of assets goes to the iShares MSCI-Japan Index Fund (NYSEARCA:EWJ), the oldest of the bunch. This product had its debut in 1996 and currently sees an impressive volume level of 13 million shares a day and a market cap over $4 billion.
Yet beyond that fund, there is also a broad, and relatively new, fund that provides similar exposure to the Japanese market, NKY. This ETF, from Maxis, doesn’t have nearly the same level of AUM or volume– $180 million in assets, 350,000 shares a day in trading—but it does follow a much more widely known index, the Nikkei 225.
The Nikkei 225 is by far the most well-known of the Japanese benchmarks and is in many ways the DJIA of the country. That is because the benchmark is also price-weighted and it seeks to reflect the broad performance of the national stock market (seeDeveloped Asia Pacific ETF Investing 101).
So while NKY tracks a more recognizable index, is the fund a better choice for Japan ETF investors out there? Below, we have highlighted some of the other key differences between the two funds in order to give investors a better idea of how investing in NKY might vary from purchasing EWJ shares for those seeking broad Japanese ETF exposure:
iShares MSCI Japan Index Fund (EWJ)
By far the most popular Japanese ETF out there, EWJ is also one of the more popular country ETFs currently on the market. The fund is also a relatively inexpensive choice, coming in at 51 basis points a year in fees, in line with other Asia-Pacific ETFs from this perspective (read Asia Ex-Japan ETF Investing 101).
Top holdings are skewed towards some well-known names withToyota (NYSE:TM) Mitsubishi Financial, and Honda accounting for the top three spots. Beyond that, a number of other financials and a few staple-like firms round out the top ten, although it should be noted that only Toyota (5.4%) makes up more than 3% of total assets.
From a sector breakdown, both industrials and consumer cyclical take up roughly 20% each, while financials and tech round out the top four. Energy and utilities are light in the ETF while mid caps only account for 8% of the product, suggesting a heavy tilt towards the biggest firms in Japan (read the Three Biggest Mistakes of ETF Investing).
Maxis Nikkei 225 Index Fund (NYSEARCA:NKY)
For a new way to play Japanese stocks, investors have NKY. The fund had its debut in July of 2011, and has managed to attract a decent investor following since then. It hasn’t hurt that the expense ratio is reasonable, coming in at 50 basis points a year, or one less than rival EWJ.
The top holdings in this ETF are made up of more names that most Americans probably haven’t heard of, with Fast Retailing (7.7%), FANUC Corp (5.85%), and Softbank (3.65%) taking the top three spots. Kyocera, Honda, and Canon do make their way into the top ten, but Toyota doesn’t crack the top dozen (although it is roughly 15th and accounts for about 1.4% of assets).
Unsurprisingly, this results in a different sector profile for the ETF as industrials (24%), and consumer cyclical (20%) take the top two spots, followed by tech and healthcare with, respectively, 15% and 10% each (read For Japan ETFs, Think Small Caps).
On the light side, energy makes up about 1% while real estate only receives about 4% of assets, along with financials, although 13% of the fund is in mid caps and another 2% in small caps, suggesting a slightly smaller average market capitalization.
|Benchmark||MSCI Japan Index||Nikkei 225 Index|
|Assets||$4.1 billion||$186 million|
|Top Holding||Toyota (5.4%)||Fast Retailing (7.7%)|
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