What a Japan fund holds
An index fund or exchange-traded fund (ETF) buys the shares in an index, so you own a small piece of every company. Funds that follow the Nikkei 225 hold 225 large companies. TOPIX and index providers such as MSCI and FTSE offer broader versions with many more. There are also funds for small companies, for single themes such as dividends or semiconductors, and for sectors.
Funds that cover the world or developed markets already include Japan, usually as a small share. A Japan-only fund is a bet that Japan will do better or worse than the rest of the world, which is a choice, not a default.
ETFs and mutual funds
An ETF trades on an exchange like a share during market hours. A mutual fund, called a toshin (investment trust) in Japan, is bought and sold at a price set once a day. Japanese households use mutual funds most, often with a small monthly purchase. Japan ETFs are listed in the US, in Europe and in Tokyo, so which one you can buy depends on where you live and what your broker offers.
Real estate investment trusts listed in Tokyo, known as J-REITs, give exposure to property such as offices, apartments and logistics centres, and pay most of their income out as distributions.
The yen: hedged or unhedged
A Japan fund holds assets priced in yen. If you buy it in dollars or euros, its value in your currency moves with both the shares and the yen. A fund that is currency-hedged tries to remove the yen effect, so you get the stock market return alone, at the cost of a small hedging fee.
Neither choice is better in every year. A weak yen helps Japanese exporters but lowers the value of an unhedged holding, and a strong yen does the opposite. Understanding which one you hold matters more than picking the right one.
Costs to compare
The annual fund fee (expense ratio, shintaku hōshū in Japan) is taken out of the fund each year, so a lower fee leaves more of the return with you. Other costs are the broker's commission, the gap between buying and selling prices, currency conversion and tax on dividends. Funds from different countries can differ in tax treatment, so compare after-tax results rather than fees alone.
Points to remember
- Read what index the fund follows and what its top holdings are. "Japan" can mean very different things.
- Check whether the fund is hedged against the yen and what it charges for that.
- Be careful with leveraged, inverse and monthly-payout funds. They are built for specific uses and are easy to misunderstand.
- Check the fund's country of registration. It affects tax on dividends and, for some investors, whether you may buy it at all.
Words you will see
- 投資信託 tōshi shintaku
- mutual fund
- 上場投資信託 jōjō tōshi shintaku
- exchange-traded fund (ETF)
- 信託報酬 shintaku hōshū
- annual fund fee
- 為替ヘッジ kawase hejji
- currency hedge
- 不動産投資信託 J-REIT
- real estate investment trust
- 分配金 bunpaikin
- fund distribution
Further reading
Books to read next
General books on investing and on the Japanese market. They are reading suggestions, not investment advice, and we do not endorse any investment.
- The Little Book of Common Sense Investing John C. Bogle The case for low-cost index funds, by the founder of Vanguard. See on Amazon ↗
- A Random Walk Down Wall Street Burton G. Malkiel A long-running introduction to how markets work and why diversifying matters. See on Amazon ↗
- The Intelligent Investor Benjamin Graham A classic on value investing and on keeping your head when markets move. See on Amazon ↗
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Sources: Japan Exchange Group; fund providers' own documents. Check each fund's documents before buying.