Yen ETF

The concept of yen ETF relates to an exchange-traded fund (ETF) that keeps track of the comparative worth of the Japanese yen (JPY) in the foreign exchange market. This action is against one certain currency or whole set of currencies, also known as a currency basket, and is achieved by investing in assets denominated in yen, whether short-term debt obligations and bonds, or cash in interest-bearing accounts. The Japanese yen ETF is the easiest way to access Japanese currency without mandatory opening a forex account.

Yen ETFs explained

ETFs allowed making the foreign exchange market more accessible to an ordinary investor, although earlier the opening of accounts in foreign currency and further transactions connected with its buying and selling were the prerogative of traders with wide experience only.

Just like other exchange-traded instruments, currency ETFs are subject to fluctuations throughout the trading day, and this depends on how other traders buy and sell these instruments. Currency ETFs, and in particular yen ETFs, are available for purchase by investors on stock exchanges, like, for example, stocks of corporate companies.

Yen ETFs mark a change in the behavior of the Japanese yen against one of the currencies in question or a basket of currencies (most often the US dollar). Instruments such as yen ETFs provide investors with an easy and affordable way to trade currencies, and allow them to diversify their portfolios. In some cases, yen ETFs help traders to take advantage of arbitrage opportunities and to hedge against major economic events.

Yen ETF portfolios typically involve futures contracts in Japanese yen, debt securities, money market funds, and cash. The investor's income is formed due to the change in the exchange rate of the yen against another currency, but also due to the receipt of interest accruing on some assets of the investor's portfolio. Sometimes the income generated from yen ETFs is regarded as a dividend yield, while in some cases it is used by others as a sum paid for managing the ETF.

More about Yen ETFs

Those investors who own yen ETFs should keep abreast of economic events and indicators that affect their instruments in one way or another.

When investing in currency, indexes such as gross domestic product (GDP), sales in retail sector and other data, inflation, trade balance, employment figures, any meetings of the central bank to decide on the interest rate, but also news on a daily basis.

To understand which currency is attractive for investors, interest rates, inflation and the state of the stock market of a particular country are taken into account. In the case of Japan, low interest rates carry out yen loans cheaper and, combined with low inflation, play into trader’s hands.

Every quarter, the Bank of Japan publishes the Tankan survey. Tankan is an economic index, which measures the business environment among major manufacturers. This is a key indicator of the Japanese economy, which forms monetary policy and influences the trading of Japanese companies' shares and the yen, which is why it is widely used by investors and traders. There is also an opinion that sometimes the demand for the yen and its value are artificially supported by local traders by dumping foreign assets and returning money to the national economy.

Benefits and drawbacks of Yen ETFs

Like other ETFs, yen ETFs have their pluses and minuses to invest in.

Benefits. Investing in foreign currencies protects the investor in the event of a fall in the national currency and helps to diversify a portfolio. The yen is one of the major reserve currencies and is actively traded around the world, in addition, this currency is considered to be a safe haven. Also, the yen is considered the most popular currency on the stock exchanges in Asia. In addition to this, another important factor is that Japan is considered to be the world's largest creditor. It is these factors that make the yen ETF a fairly stable instrument on the stock exchange and explain the wide demand for this type of ETF.

Drawbacks. Currency ETFs are often considered a risky instrument, and this is due to the fact that despite the stability of the certain economy, macroeconomic events can have a powerful impact on the value of currencies around the world. Unforeseen events, such as the outbreak of a previously unknown virus or natural disasters that cannot be predicted, can cause the value of the yen to change, up to a recession.

However, financial analysts have identified a number of issues that call into question the opinion about the safe-haven status of yen ETFs, for example, the trade deficit in Japan. In addition, these analysts noted the fact that worthy capital allocation options in Japan are running out, and local asset managers are acquiring high-yield assets of foreign companies.

Due to the current downtrend in interest rates among the world's largest economies, the yen's advantage as a popular carry trend tool has fallen a bit. For successful transactions, a trader should have information about major foreign currencies and the current economic situation in the country he invests in. Also, he should  understand the basics of the relevant economy and specific factors that can somehow affect currencies.

Yen ETFs examples

The most common yen ETF option is the Invesco CurrencyShares Japanese Yen Trust (FXY) with $144.6 million in assets under management (AUM) (as of 06/30/2022). There are other yen ETFs for investors to add to their portfolio - ProShares also offers two Yen ETFs, the ProShares Ultra Yen ETF (YCL) and the ProShares UltraShort Yen ETF (YCS). However, the investor should be aware that these ETFs are leveraged ETFs.

US investors can invest in the Nikkei 225, Japan's leading stock index, through ETFs:

• iShares MSCI Japan ETF (EWJ)
• JPMorgan BetaBuilders Japan ETF (BBJP)
• WisdomTree Japan Hedged Equity Fund (DXJ)
• Franklin FTSE Japan ETF (FLJP)
• iShares Currency Hedged MSCI Japan ETF (HEWJ)
• WisdomTree Japan SmallCap Dividend Fund (DFJ)
• The Xtrackers MSCI Japan Hedged Equity ETF (DBJP)
• The iShares JPX-Nikkei 400 ETF (JPXN)