What is a Japan ETF?

John Lister

A Japan ETF is a type of exchange traded fund. This is an investment fund where owners of "units" in the fund can buy and sell the units in the same way as stocks. A Japan ETF will own assets in a range of corporations designed to reflect the overall performance of Japanese businesses and, in turn, the Japanese economy.

Many economic news sources look to the Tokyo Stock Exchange as a bellwether for the Japanese economy as a whole.
Many economic news sources look to the Tokyo Stock Exchange as a bellwether for the Japanese economy as a whole.

An exchange traded fund is technically an investment company that buys assets such as stocks. Investors can buy a unit in the fund. Unlike mutual funds, units in an exchange traded fund can be bought or sold at any time during the trading day for whatever price is agreed upon in the deal. Mutual funds can only be sold at the end of the day and the price is directly linked to the fund's assets.

A Japan ETF will own assets in a range of corporations designed to reflect the overall performance of the Japanese economy.
A Japan ETF will own assets in a range of corporations designed to reflect the overall performance of the Japanese economy.

One advantage of an exchange traded fund is that it combines the diversification of the mutual fund with the potential to profit from market variations of individual stocks. There are also significant tax benefits. Because the buying and selling of the underlying assets are carried out by the fund itself, unitholders only take an income when they sell their unit itself. This makes it much easier to control when the income is received, giving greater control over when tax liabilities arise.

A Japan ETF buys assets such as securities in a range of Japanese corporations. It does not aim to mirror a specific Japanese stock market, which may include foreign companies, but rather the Japanese economy itself. This means the biggest influences on the ETF performance will be factors related to Japanese business.

One factor in a Japan ETF that can be both a drawback and a benefit is the currency factor. In some cases, there is no protection for a foreign investor against currency variations. This means that an American investor could make a paper profit on a Japan ETF, only to find it wiped out by changes in the yen-dollar exchange rate. Of course, this can also work the other way. Some investors even use overseas ETFs as a way to hedge against currency movements going against their interests in overseas investments.

There are some case where a Japan ETF is protected against currency changes. This means that the money investors get back will be adjusted in line with the exchange rate when they first bought the unit. This means the risks and benefits depend entirely on how the relevant assets perform. Japan is one of the few countries where this option is available to ETF investors.

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