Chart of monthly flows to European domiciled Japanese ETFs, €. Source Lyxor ETF, Bloomberg.
We've said it before, but Japan is becoming an increasingly attractive investment destination, with a bright economy and an appealing income story. House prices are rising, consumption is picking up and earnings per share are growing faster than in any other major market. Japan still appears quite cheap, with discounts vs. world stocks higher than normal. Some of Shinzo Abe's arrows finally appear to have hit at least some of their targets.
In Japan particularly, there is a good justification for going passive - the Bank of Japan is a major buyer of ETFs. Flows rebounded strongly in September, after outflows in August, but the rush to the land of the rising sun is not without its subtleties. The major indices come in various shapes and sizes, so it's important you know why you're really investing in Japan. What you think of its prospects matters an awful lot when it comes to choosing your index.
- They derive their revenues from different places
The higher an index's share of domestic revenue, the less sensitive it is to movements in the yen. The TOPIX offers exposure to the full Japanese economy - it's the broadest of the mainstream Japanese indices which matters if you think recovery will be broad-based or if you're backing the yen to strengthen from here.
More yen weakness would ordinarily point to the Nikkei 225, but you might miss out on the domestic recovery/reflation story.
- They view sectors differently
The SG Japan Quality Income Index excludes financials entirely, while the other indices have exposures that reflect their domestic, or their export, focus. The differences aren't always too great however.
- They come in all shapes & sizes
The SGQJ does not use any size weighting in its methodology, leading to much more of a small-cap bias. As a result, it is also more growth-oriented than the market cap indices. Choosing a quality income play doesn't have to mean limiting your participation in a recovery. The JPX-Nikkei 400 index consists of companies expected to deliver shareholder value. Using measures such as efficient use of capital and good corporate governance, the Index aims to provide investors with high quality exposures. If you believe Japan's corporate culture is changing as it should, this could be the index for you.
- Some concentrate more than others
The TOPIX gives you the broadest exposure to Japan but its small-cap exposures do add some risk. The Nikkei 225 is by far the most top-heavy of the indices. Its pricing methodology and lower number of constituents make it more volatile than the others as well.
- Managers find them hard to beat
Over 10 years, fewer than 1 in 6 managers have outperformed the TOPIX
Lyxor offers four options for investors buying Japan, including GBP, EUR and USD currency hedged variants. Find out more at LyxorETF.co.uk
Unless otherwise stated, all data is sourced Factset, Bloomberg as at 10 October 2017. Manager performance information from Bloomberg, Morningstar correct as at October 2017. Charges from Lyxor ETF, correct as at 17th October 2017
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