How to Invest in Japan ETF? Best Nikkei 225 ETFs

Japan has recently gained attention as Warren Buffett has invested in the country. This interest is partly because Japan hosts numerous large, high-quality companies available at very appealing valuation multiples.

Notably, Japan ranks as the third-largest market by capitalisation globally, trailing only the United States and China.

What is Nikkei, and why is it an attractive investment option?

The Nikkei 225, often simply called the Nikkei, is a stock index that tracks the 225 largest companies listed on the Tokyo Stock Exchange. Unique for its price-weighting method, similar to the Dow Jones Industrial Average, it stands in contrast to many other indices like the S&P 500, which are market capitalisation-weighted.

Introduced in 1949, the Nikkei has been calculated by the Nihon Keizai Shinbun newspaper since 1971, with its name derived from the newspaper's initials.

The composition of the Nikkei 225 is reviewed annually, with updates typically made in early October. However, in exceptional circumstances, adjustments can occur at other times.

Prominent members of the index include well-known companies such as Mitsubishi, Sony, TDK, and Canon, showcasing the diverse industrial representation within the Nikkei.

In addition to the Nikkei 225, there is also the Nikkei 400, which encompasses a broader selection of companies and is weighted by market capitalisation, offering a wider perspective on Japan's corporate landscape.

The three main reasons to invest in the Nikkei are:

  • Cheap valuation in relation to the USA
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  • Manufacturing production has recently rebounded thanks to increased global demand for cars and automation robots.
  • The growing demand for automation in manufacturing, where Japanese companies are indispensable.
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Why to invest in Nikkei 225 using ETFs?

One reason to invest in Nikkei using ETFs is because there is more variety to choose from with direct exposure to the index than mutual funds. They have lower internal operating costs, lower tracking error and lower commissions.

ETFs can be purchased with a regulated broker and traded throughout the market session, just like stocks.

Which companies are part of Nikkei?

The following image shows the top ten positions in the index with their weight and the sector they belong to:

The sector with the highest weight in the Nikkei index is the technology sector with 48.20% followed by the consumer goods sector with 23.29%.

Top 3 best Japan ETFs

Although there are many ETFs that track the Japanese stock market, here are the top three ETFs you may want to consider:

The most notable difference between these three ETFs apart from the TER, is that the first one, XDJE, has currency hedging.

All three have a full physical replication method and their base currency is the Japanese Yen.

Looking for a broker to buy ETFs to invest in Nikkei? Check out our recommendations:

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Investing in Nikkei through ETFs presents a practical way to gain exposure to Japan's dynamic market without the need to individually pick stocks. These ETFs offer diversification across the 225 leading companies in the Nikkei, including sectors like technology, manufacturing, and consumer goods.

By investing in a Nikkei ETF, investors can benefit from the growth potential of Japan's economy and its corporate giants with a single transaction. Moreover, ETFs provide liquidity, cost-efficiency, and flexibility, making them an attractive option for those looking to diversify their portfolio internationally and tap into the investment opportunities presented by Japan's market.


Are Nikkei ETFs risky?

Like all investments, Nikkei ETFs carry risk, particularly from market fluctuations, currency exchange rates, and economic changes in Japan. However, ETFs offer diversification, which can help mitigate some risk.

How does currency exchange affect my investment?

Investments in Nikkei ETFs involve converting GBP to JPY, exposing investors to currency risk. Fluctuations in the exchange rate can affect the investment's value when converted back to GBP.

Can I use a Nikkei ETF for long-term investment?

Yes, a Nikkei ETF can be a suitable option for long-term investors looking to include Japanese equities in their diversification strategy, assuming they are comfortable with the associated risks.

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