What is a Yen Exchange Traded Fund (ETF)?
A yen ETF is an exchange traded fund (ETF) that tracks the relative value of Japan’s currency, the yen (JPY), versus a basket of other currencies or a single currency, such as the US dollar, in the foreign exchange (forex) market (USD).
This is accomplished mostly through the purchase of yen-backed assets, such as short-term debt instruments and bonds, or by simply keeping the spot currency in interest-bearing accounts.
- The relative value of Japan’s currency against a basket of other currencies or a single currency is tracked by a yen ETF.
- This is accomplished via investing in yen-denominated instruments such as futures contracts, debt securities, money market funds, and cash deposits.
- Some yen ETFs have a dividend yield that matches the current income produced on yen assets. Others utilize that money to cover the costs of running the ETF.
- Leveraged Yen ETFs provide 2x long or short exposure to USD/JPY swings.
- The yen has always been seen as a safe haven currency, which means it is sought after by investors during times of increased geopolitical danger.
What Are Yen ETFs and How Do They Work?
Buying and selling foreign currencies used to be a luxury reserved for professional merchants with extensive knowledge. ETFs aided in this transformation by making the forex market more accessible to the common investor.
Currency ETFs are a type of pre-packaged investment that aims to track the performance of a certain currency, similar to how ordinary ETFs aim to track the performance of an index. These automobiles are available for purchase on a stock exchange. Their prices change throughout the day as traders purchase and sell them, just like stocks.
Yen ETFs typically hold yen-denominated futures contracts, debt instruments, money market funds, and cash deposits in their portfolios. The performance of the yen versus other currencies, as well as interest generated by various securities in the portfolio, generate income for investors. Some yen ETFs have a dividend yield that matches the current income produced on yen assets. Others utilize that money to cover the costs of running the ETF.
The Advantages of Yen ETFs
Investing in foreign currencies allows investors to protect themselves if the value of their own currency falls. Many people have chosen the yen over the years since it is the third most extensively traded currency in the world, after the US dollar and the euro, and the most widely traded currency in Asia.
Because it frequently trades inversely to the other major currencies in reference to the US dollar, the yen is occasionally employed to provide diversity. The money, which is frequently used as a reserve currency in international transactions, has a long history of being regarded as a safe haven.
Japan is the greatest creditor in the world. Traders also believe that in times of difficulty, investors in Japan may sell their foreign holdings and bring their money home, boosting demand for the yen and, as a result, its value.
Yen ETFs’ Limitations
Currency ETFs are considered dangerous by some investors since macroeconomic events affect currency values all throughout the world, including in stable countries like Japan. Unpredictable natural disasters can also have a significant influence, like as the Fukushima accident in 2011, which resulted in a sharp increase in the value of the yen, followed by a recession.
A few commentators have recently questioned the Japanese yen’s safe-haven reputation, citing the country’s trade deficits, local asset managers’ purchases of higher-yielding overseas assets, and Japanese enterprises’ lack of viable options for capital deployment at home. As low-interest rates become more frequent across major nations, the yen has lost part of its appeal as a popular carry trade.
These insights serve as a stark warning that forex trading is not for the faint of heart. Traders must be familiar with major foreign currencies and keep up to date on not just current economic statistics for a country, but also the underlying economic structures and particular factors that can influence currencies, such as commodity movement or interest rate fluctuations.
When trading in currencies, investors should monitor all significant economic statistics, such as the publication of GDP, retail sales, industrial production, inflation, trade balances, employment figures, interest rates, including scheduled central bank meetings, and the daily news flow.
When considering the relative attractiveness of a foreign currency, interest rates, inflation, and the success of the country’s stock market should all be considered. Japan and yen traders have always found the currency appealing as a carry trade due to historically low inflation and interest rates. Borrowing in Yen to fund risk-taking in other, higher-interest currencies is relatively inexpensive due to low interest rates.
The Tankan poll is also worth paying close attention to. Every quarter, the Bank of Japan (BOJ) releases Tankan, an economic study of Japanese firms. It is utilized to develop monetary policy and, as a result, it frequently moves stock and currency trade in Japan.
Interest rates, inflation, a country’s economic fundamentals, and political stability all influence currency market movement.
Investing in Yen Exchange Traded Funds (ETFs)
The Currency Shares Japanese Yen Trust (FXY) is the most popular yen ETF, with $190 million in assets under management (AUM). RydexSGI created FXY in 2007 with the goal of mirroring the price and performance of the Japanese yen against the US dollar by holding Japanese yen on deposit. The fund has a 0.40 percent cost ratio.1
There are a few more choices for those wishing to add yen ETFs to their portfolios. ProShares Ultra Yen ETF (YCL) and ProShares UltraShort Yen ETF are two other options (YCS). These, on the other hand, are leveraged ETFs, the latter of which is an inverse ETF.
What Is the Best Way to Invest in Yen?
Japanese Yen ETFs are the most convenient approach for a regular investor to invest in the JPY.
What is the main exchange-traded fund (ETF) that trades the Japanese yen?
The FXY is the most prevalent of these securities; it is a physical Yen account. The ProShares Ultra Yen ETFs are another possibility, but they are leveraged. To the Yen, the YCL provides 2x long exposure, while the YCS provides 2x inverted exposure.
What Is the Best Way to Invest in the Nikkei?
Through an exchange-traded fund (ETF), American investors can invest in the Nikkei 225 index, Japan’s leading stock index. These are some of them:
EWJ: The iShares MSCI Japan ETF
BBJP: The JPMorgan BetaBuilders Japan ETF
DXJ: The WisdomTree Japan Hedged Equity Fund
FLJP: The Franklin FTSE Japan ETF
HEWJ: The iShares Currency Hedged MSCI Japan ETF
DFJ: The WisdomTree Japan SmallCap Dividend Fund
DBJP: The Xtrackers MSCI Japan Hedged Equity ETF
JPXN: The iShares JPX-Nikkei 400 ETF