To The Moon

Japan was once the world's hottest stock market but later fell into a decades-long slumber. The Japanese stock market experienced a revival in 2023, rekindling investors' awareness of its long-term potential.

Japan, once the world's hottest stock market, went through a prolonged period of dormancy. However, in 2023, the Japanese stock market witnessed a resurgence, rekindling investors' awareness of its long-term potential.

In 2023, the Nikkei 225 stock index recorded a substantial surge, boasting a growth rate of 28%, outpacing the S&P 500 index's 24%. This marks a significant turnaround for the Japanese stock market, breaking free from its lackluster performance in 2022 and the preceding decade.

Several factors triggered this upswing, including the widespread belief that Japan is addressing its persistent deflation issues, enhancing corporate governance, and restructuring the stock market to be more favorable to shareholders through a decade-long series of structural reforms. Additionally, there's anticipation that the Bank of Japan will promptly ease financial restrictions, particularly those related to bond yield, making Japanese assets more enticing.

Given these dynamics, it appears to be an opportune moment for investors to consider augmenting their investments in Japan.

Japan hosts the headquarters of many renowned multinational companies, including Honda Motor Co. (HMC) and Sony Group Corporation (SONY). Through investments in Japanese ETFs, investors stand to profit from the growth of these companies and numerous others.

Simultaneously with the Japanese stock market reaching new highs, Warren Buffett continues to increase holdings in five Japanese trading companies.

During the Davos Forum, the CEO of Sumitomo Corporation revealed that since disclosing increased holdings last summer, Berkshire Hathaway (BRK.A)-Hathaway has been steadily increasing its holdings in Japan's five major trading companies. In August 2020, Berkshire Hathaway first disclosed holdings of 5% in each of the five major trading companies, and by June 2023, this proportion had increased to over 8.5%.

These five companies are Sumitomo, Mitsubishi, Mitsui, Itochu, and Marubeni. Estimated as of June 2023, the total value of these holdings is approximately $20 billion, making it one of Buffett's most successful investments in recent years. Since Berkshire Hathaway established its position in 2020, the average increase in the value of these five stocks has exceeded twice. With the Nikkei 225 index recently reaching its highest level since 1990, Buffett and Berkshire Hathaway executives are satisfied with the performance of this investment, hoping to eventually increase the holdings to 9.9% for each company.

Top Japanese ETFs in 2023

Below, we will examine the three best Japanese ETFs focusing on the lowest cost, the best 12-month returns, and the strongest liquidity. We have excluded leveraged ETFs, which offer significant returns but also come with additional risks. All data is as of January 18, 2024.

1. ETF with the Strongest Liquidity: iShares MSCI Japan ETF (EWJ)

   • 1-year performance: 20%

   • Expense ratio: 0.50%

   • Assets under management: $13.5 billion

   • Inception date: March 12, 1996

   • Issuer: BlackRock Financial Management Company

EWJ is the oldest ETF in Japan with the largest assets under management and the highest liquidity. The fund holds a portfolio of approximately 240 large Japanese stocks and tracks the MSCI Japan Index. Industrial stocks make up the majority of the portfolio, followed by non-essential consumer goods and information technology stocks. The fund's major holdings include Toyota, Sony Group, and Canon.

2. Lowest-Cost Japanese ETF: Franklin FTSE Japan ETF (FLJP)

   • 1-year performance: 21%

   • Expense ratio: 0.09%

   • Assets under management: $1.76 billion

   • Inception date: November 2, 2017

   • Issuer: Franklin Templeton

FLJP holds a portfolio of over 500 large and medium-sized Japanese stocks, providing broad investment across various industries. The fund aims to replicate the performance of the FTSE Japan Top Index. Industrial stocks, non-essential consumer goods stocks, and information technology stocks dominate the portfolio. The fund's major holdings include Toyota Motor Corporation, Sony Group, and Canon Inc.

3. Best 12-Month Return Japanese ETF: WisdomTree Japan Hedged Equity Fund (DXJ)

   • 1-year performance: 47%

   • Expense ratio: 0.48%

   • Assets under management: $3 billion

   • Inception date: June 16, 2006

   • Issuer: BlackRock Financial Management Company

DXJ has a specific investment theme, focusing on a portfolio based on Abenomics with an emphasis on dividends. Due to the depreciation of the Japanese currency, the fund is expected to benefit from increased economic activity in Japan. DXJ selects dividend-paying Japanese companies of various capital sizes, especially those with less than 80% of their income coming from Japan. The fund's major holdings include Toyota Motor Corporation, Mitsubishi UFJ Financial Group, Japan Tobacco Inc., and Sumitomo Corporation.