How to Invest in the Japanese Stock Market

Translating the Nikkei 225

How to Invest in the Japanese Stock Market
January 6, 2015

Toyota, Honda, Sony, Panasonic and Toshiba are some of the most well-known and well-respected companies in the world. These brands have become so commonplace in the U.S. that it can be easy to forget that these companies are not listed on a U.S. stock exchange. Rather, they are listed on the Tokyo Stock Exchange (TSE), the world’s second largest stock exchange behind the New York Stock Exchange.

So how does a U.S. investor gain broad exposure to these and other blue-chip Japanese companies? The best way is to buy shares of an exchange-traded fund (or ETF) that tracks the performance of the Nikkei 225, the most popular benchmark for the Japanese and Asian stock markets. It is essentially the Japanese equivalent of the Dow Jones Industrial Average.

What is an ETF?

An ETF is a basket of stocks that represents an underlying index — in this case, the Nikkei 225. Buying shares of a Nikkei ETF would give you exposure to all of the 225 companies in the index by purchasing just one fund.

The Nikkei, which includes the 225 largest companies on the TSE in terms of market capitalization and liquidity, is generally considered a good barometer of the Japanese economy and the TSE. Since U.S. investors cannot invest directly in an index tracking the Nikkei 225, and buying and managing the stock of every company listed in the Nikkei is not practical, the next best thing is to invest in an ETF that tracks the Nikkei 225.

There is currently just one U.S.-listed, dollar-denominated ETF that tracks the Nikkei: the MAXIS Nikkei 225 Index ETF (NKY). This index, which has around $87 million in assets under management, currently trades on the New York Stock Exchange. As of January 5, 2015, it had traded between $16.25 and $18.22 per share over the previous 12 months.

Another Option to Consider

Another option is to buy a Nikkei 225 index fund that is traded on the Tokyo Stock Exchange. There are several of these to choose from, including Blackrock Japan’s iShares Nikkei 225 ETF, Nomura Asset Management’s Nikkei 225 ETF, and Daiwa Asset Management’s Daiwa ETF Nikkei 225. To do so, though, you will need to open an international trading account with a brokerage firm that permits investing in a foreign exchange, such as E*Trade or Fidelity. Opening up such an account will also allow you to trade the shares of companies listed on the Tokyo Stock Exchange (like Toyota, Honda, Sony, Panasonic and Toshiba).

You should note, however, that these ETFs and stocks are denominated in yen, not dollars. Fluctuations in the exchange rate between the yen and the dollar will affect your returns, adding another level of complexity to these investments.

Therefore, the simplest and most efficient way for most U.S. investors to invest in the Nikkei 225 is to buy shares of the MAXIS Nikkei 225 Index. Doing so will give you broad exposure to some of the top blue-chip companies in Japan, which can add an additional layer of diversification to your portfolio.

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