Tony's ETF Buyers Guide: Japanese Equity ETFs

iShares MSCI Japan ETF (EWJ)

If you're in the market for the largest and most liquid Japanese ETF, the iShares MSCI Japan ETF (

) stands out as the go-to option.

Part of iShares' expansive single-country equity lineup,

boasts an impressive $16.6 billion in assets under management (AUM) and sees an average trading volume of 9.7 million shares over a 30-day period. This high level of activity translates to a very low 30-day bid-ask spread of just 0.01%, underscoring its liquidity and ease of trading.

follows the MSCI Japan Index, which comprises over 200 market-cap-weighted holdings, focusing primarily on large and mid-cap companies. Within its portfolio, investors will find familiar names such as Toyota, Sony, Mitsubishi, and Hitachi.

However, it's worth noting that

comes with a 0.50% expense ratio, which is relatively high for an ETF in this category.

Given this cost factor, I tend to view

more as a trading tool rather than a long-term buy-and-hold investment, although its size and liquidity still make it an attractive option for those looking to gain exposure to the Japanese equity market.

Franklin FTSE Japan ETF (FLJP)

For passive buy-and-hold investors looking for Japanese equity exposure, the Franklin FTSE Japan ETF (

) is my top pick.

Tracking the FTSE Japan Capped Index,

might be smaller in scale compared to some of its counterparts, with $1.9 billion in assets under management, but it shines for a few key reasons.

Notably, FLJP's expense ratio is significantly lower than that of EWJ, coming in at just 0.09%. This means that for a $10,000 investment, the annual cost would be only $9, compared to $50 with EWJ.

The FTSE Japan Capped Index, like the MSCI Japan Index, focuses on market cap-weighted large and small companies, offering a broad representation of the Japanese equity market. However, FLJP's index includes a cap on the weightings of its top holdings.

This approach is designed to reduce the risk of over-concentration in any single stock, providing a more balanced and diversified investment.

WisdomTree Japan Hedged Equity Fund (DXJ)

For those aiming to potentially outperform a market-cap weighted index, my recommendation is the fundamentally weighted

. This unique ETF follows the proprietary WisdomTree Japan Hedged Equity Index, focusing specifically on dividend-paying Japanese stocks.

A distinctive feature of

is its exclusion of companies that derive 80% or more of their revenue from Japan, favoring instead those with a greater exposure to international markets, typically exporters.

A crucial aspect of

is its currency hedging mechanism. This is designed to protect investors against depreciation of the Japanese Yen relative to the U.S. dollar.

Given the historical strength of the U.S. dollar, this hedging strategy can be particularly beneficial, safeguarding the fund's returns from currency fluctuations that could otherwise diminish the value of Japanese stock earnings when converted back to dollars.

With an expense ratio of 0.48%, DXJ's fees are comparable to those of EWJ. However,

has demonstrated its ability to outperform, with a notable annualized return of 12.33% over the last ten years, significantly surpassing EWJ's 4.56%.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.