Nikkei Index Fund and other Japan ETFs

What is the Nikkei 225 Index?

The Nikkei 225 is one of the most well known Japanese benchmark index. Unlike the Chinese stock market indexes. There are a number of index funds that tracks the major Japanese equity indexes for US investors.

Similarly to the Dow Jones Industrial average, the Nikkei index is calculated on a price weighted basis of the 225 largest Japanese stocks on the Tokyo stock exchange.

With 225 largest Japanese corporates, the index provides a good coverage of the Japanese equity exposure with like NTT DOCOMO in Telecoms, Sony in Consumer Electronics, Mitsubishi and Toyota in manufacturing.

The Nikkei index peaked in the late 1990s during the Japanese stock market bubble and have not recovered since.

Nikkei Index Funds

MAXIS Nikkei 225 Index ETF (NKY) the largest exchange traded funds that tracks the Nikkei 225. Alternative large cap ETFs that tracks the Japanese markets include iShares MSCI Japan Index Fund (EWJ) and WisdomTree Japan Hedged Equity Fund (DXJ).

DXJ can be a good option for investors that want Japanese market exposure without the USD/JPY risk or foreign exchange risk.

 

The charts above shows EWJ tracks the NKY closely over the last year. The return profile shows both the Nikkei 225 and MSCI Japan are very similar on a high level basis.

ETF short Nikkei Index

Aside from Direxion Daily Japan Bear 3x Shares (DXJF) which is a tiny ETF providing 3x leverage short to Japan stock market. There are no ETF that provides the inverse or short Nikkei index. Investors wanting a Nikkei short ETF can create a exact exposure from either shorting the Nikkei Index futures contract listed on the CME or directly short the Nikkei index funds like NKY.

There are also no leveraged long Nikkei ETFs.

Japanese Small Cap Index Funds

Investors at the higher end of the risk curve can also invest in Japanese Small Cap ETFs. One smart beta fund WisdomTree Japan Small Cap Dividend Fund (DFJ) is designed for dividend investors and iShares MSCI Japan Small Cap Index Fund (SCJ) is a traditional small cap index fund.

Similarly to the hedged Nikkei index fund there are also hedged version of the small cap Japan ETF (WisdomTree Japan Hedged Small Cap Equity DXJS).

State Street through SPDRs also have a small cap option for investors, the SPDR Russell/Nomura Small Cap Japan ETF (JSC).

Other Japan Index Funds

ETF providers created more niche ETFs that tracks specific Japanese sectors such as Hedged Japan Financials, Real Estate, Health Care or Capital Goods. However given the low asset under management in these ETF, we would be cautious in allocating any funds to these index funds.

Japanese Market Forecast

It is no secret that Japan has been in the doldrums in the last 2o years for equity investors. Since the election of Shinzo Abe and the turnaround driven by Abenomics.

The Japanese stock market had a great 2012 and 2013. The fall in Yen vs Dollar from 80 to 120 JPY per US dollar has supported Japanese corporate profitability and return on shareholder equity.

Current economic environment is positive for investors and will continue to do so as economic growth and the fight to end deflation continues to be important economic policy consideration of the current government.

Aside from the growth in exports through lower Yen. The domestic economy will also be supported through the preparation of Tokyo 2020 olympics. Commercial office rental and construction has been ramping up in the revitalization of new Olympic areas.

All of the above is conditional on the BOJ and the Japanese government to come through in the implementation of Abenomics. The market has high expectation and so far policy makers has delivered. But they would still need to follow through with economic reform to ensure Japan’s growth engine will continue.