After decades of stagnation, Japan is rising again as a place to invest. Even Warren Buffett is jumping in. And ETFs offer a way to take part.
Shares of the WisdomTree Japan Hedged Equity ETF and iShares Currency Hedged MSCI Japan ETF returned 19.5% and 19.2% this year, respectively, including dividends, says Morningstar Direct. That makes them the No. 2 and No. 3 top-performing actively traded foreign ETFs this year. Only the Global X MSCI Greece ETF, up 28.6%, is doing better.
"Japan is basking in the international spotlight," said Jack Ablin of Cresset Capital Management.
Japan ETFs Rise Anew
Signs of Japan's comeback for investors are compounding, Ablin points out.
Japan's key market index, the Nikkei 225, "just reached a level not seen since 1990, a time when Tokyo real estate was valued as much as $139,000 a square foot, nearly 350 times as much as equivalent space in Manhattan," Ablin said.
And money is moving fast into the most popular Japan ETF, the $11 billion-in-assets iShares MSCI Japan ETF, Ablin says.
What's attracting investors? Several things. Low valuations are one, Ablin says. The stocks on the Nikkei 225 are trading for just 15-times future profit, down from 61 times in the 1990s. Additionally, Japanese firms' profits are seen rising 2% this year, versus a 2% fall in the S&P 500.
Japan is also benefiting from political tensions between the U.S. and China. Japan is suddenly now a more attractive source of corporate investments. And that's fueling economic growth. Japan's GDP is rising 1.6% annually, ending years of deflation. The weak Yen versus the U.S. dollar, too, helps exports.
"A cheap Yen offers Japanese exporters an enormous cost advantage, as any revenue generated abroad will translate to stronger Yen-based profits at home," Ablin said.
Playing Japan With ETFs
Japan is just one of the international regions starting to pay off for investors. For the first time in years, global ETFs, which include Japan, are faring well.
The iShares MSCI EAFE ETF, which invests in all the developed world excluding the U.S., is up nearly 10% this year.
"In 2023, it has been fruitful to invest in developed international markets and U.S. investors have been rewarded for reducing their home bias," says Todd Rosenbluth, head of research at VettaFi.
The first caveat investors should know, though, before jumping into Japan ETFs is that they may already own quite a bit of Japan if they own international ETFs, Rosenbluth said. Japan is the largest country weighting of the iShares MSCI EAFE ETF at nearly 22%.
"Investors considering investing in a Japanese focused ETF first need to realize they likely already have exposure in broad international ETFs," he said.
To Hedge Or Not
Also, investors interested in Japan must decide is whether or not to hedge against the weakening Yen vs. the dollar. Doing so far has paid off. That's why WisdomTree Japan Hedged Equity ETF and iShares Currency Hedged MSCI Japan are beating other Japan ETFs this year.
iShares MSCI Japan, on the other hand, invests in Japanese companies like Toyota and Sony, but don't use currency hedges, Rosenbluth says.
And that's not say investing in Japan ETFs is risk free, Ablin says. The nation is still dealing with an aging population and relies on trade with China. But you're at least getting well-priced shares.
"We're not convinced that a new day is dawning on Japan, given its fundamental challenges," Ablin said. "However, there is no doubt that Japan equities are relatively cheap. Buying cheap equities denominated in cheap currencies offers U.S. investors two ways to win."
Big In Japan ETFs
The largest Japan ETFs are posting solid price gains this year
| ETF | Symbol | Assets ($ billions) | YTD ch. |
|---|---|---|---|
| iShares MSCI Japan | 11 | 9.9% | |
| JPMorgan BetaBuilders Japan | 7.9 | 10.0% | |
| WisdomTree Japan Hedged Equity Fund | 1.8 | 18.1% | |
| iShares MSCI Intl Value Factor | 1.7 | 7.7% | |
| Franklin FTSE Japan | 1.1 | 9.6% | |
| Invesco CurrencyShares Japanese Yen Trust | 0.3 | -5.8% | |
| Xtrackers MSCI Japan Hedged Equity | 0.3 | 18.9% | |
| iShares MSCI Japan Value | 0.2 | 7.5% | |
| WisdomTree Japan SmallCap Dividend Fund | 0.2 | 4.3% | |
| iShares Currency Hedged MSCI Japan | 0.1 | 18.6% | |
| iShares MSCI EAFE | 0.1 | 9.1% |
Sources: VettaFi, S&P Global Market Intelligence, IBD
Follow Matt Krantz on Twitter @mattkrantz
