3 Top Rated ETFs for Japanese Equities

Japan has more to gain or lose from changes to US economic and foreign policy under a Trump presidency than most.

As its largest trading partner, the US accounts for around one-fifth of all Japanese exports. As such, the fortunes of the Japanese equity markets, which are packed with exporters like Sony and Toyota, will be closely linked to the decisions made within the incoming Trump administration.

Despite the country being the subject of much accusatory finger pointing during Mr Trump’s campaign speeches, there are reasons for Japanese equity investors to remain positive.

Expectations of rising rates in the US have already seen a strengthening of the US dollar against the Yen. This, coupled with the expected large-scale fiscal stimulus in the US, could both lower the cost and increase demand for Japanese goods and services, boosting the exported-orientated Japanese equity markets.

On the other hand, Trump’s protectionist rhetoric has left the fate of the Trans-Pacific Partnership free-trade agreement, which includes Japan, hanging in the balance. The introduction of additional trade restrictions or tariffs would portend bad news for Japanese exporters.

Following an initial sell-off, Japanese equity markets have responded positively to the electoral shock.

Which are the Best Japanese Equity Funds?

Morningstar recently launched Analyst Ratings for a broad range of equity and fixed-income ETFs. The Morningstar Analyst Rating is a forward-looking qualitative assessment of a fund’s ability to offer superior returns relative to its peers – whether active or passive – over the long-term.

Amongst the European-domiciled ETFs assigned an Analyst Rating, the following three are some of the highest rated funds offering exposure to Japanese Equity markets.

iShares Core MSCI Japan IMI ETF (IJPA)

We have awarded our highest rating of Gold to this ETF, which is one of our favourite passive offerings in a market in which active managers have struggled to demonstrate their worth.

The MSCI Japan IMI Index it tracks offers one of the most representative cap-weighted exposures to Japanese large-cap equities. Covering around 1,200 Japanese companies, including large-, mid-, and small-caps, the index represents around 99% of the free-float-adjusted market.

With an ongoing charge of just 0.20%, the fund is one of cheapest Japan ETFs available. The yawning fee gap between this fund and the average fund in the Morningstar category of 1.64% has proved to be a formidable hurdle for active managers.

The low fee, coupled with an underperformance of active managers, has seen the fund outshine its surviving category peers over three and five years on a risk-adjusted basis.

Vanguard FTSE Japan ETF (VDJP)

One of only two Gold-rated ETFs offering exposure to broad Japanese equities, this fund exhibits all the hallmarks of a top-notch tracker. With around 480 constituents, including a number of mid- and small-caps, the FTSE Japan Index is narrower than either the TOPIX or MSCI Japan IMI indices but still stands as an excellent proxy for the Japanese equity markets.

With an ongoing charge of only 0.19%, the fund holds a fee advantage over both passive and active funds peers. This has helped the fund clearly outshine its surviving category peers over three years when ranked on a risk-adjusted basis. This strong performance can be extended out to 10 years if we include the returns of older funds tracking the same index.

In addition to its low fee and strong performance, what sets this fund apart from the other trackers is our positive view of Vanguard. The source of Vanguard’s competitive advantage and the foundation of its culture is its mutual ownership structure. Fund shareholders own Vanguard through their funds, which compels the firm to operate at cost rather than for profit and to put investors’ interests first.


We have awarded this ETF a Silver rating. Due to its sprawling coverage, the TOPIX Index offers the broadest and most representative cap-weighted exposure to Japanese large-cap equities. Including almost 2,000 Japanese companies, it approximates the total market exposure.

It has performed well, out-performing its surviving category peers over three, five, and 10 years on a risk-adjusted basis. The fund has also been the best-performing ETF tracking the TOPIX Index over the trailing five-years period.

With an ongoing charge of 0.45%, this fund isn’t the cheapest available, and for this reason we cannot give the fund our highest rating.

Source: Morningstar. Kenneth Lamont | 21/11/2016

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