The best Japanese tracker funds for the long term

Is Japan's stock-market surge the start of a major uptrend, or a mini-bubble that's set to burst? US commentator Peter Schiff reckons Japan's recent money-printing will end in tears. But veteran observers such as Tokyo-based fund manager Ed Merner note that last summer, Japan's shares had hit 30-year lows in valuation terms. On that basis, the recent jump in interest from international investors may only be the start of a more substantial bull market.

I worked with Merner 20 years ago and trust his judgement on this. The surge in Japanese shares since the start of the year may give way to a temporary dip, but I think there's plenty of upside left for longer-term investors. So, assuming you want to invest in Japanese shares via a diversified, index-based, exchange-traded fund (ETF), which should you pick?

The index most of us use to gauge the health of the Japanese stock market, the Nikkei 225, is actually the least suitable for buy-and-hold' investors. The Nikkei uses an outdated price-weighted approach to picking stocks, meaning that firms with the highest share prices are overly represented. For most international investors, therefore, the index of choice is the MSCI Japan.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Five London-listed ETFs track it via shares denominated in sterling. iShares' MSCI Japan fund (LSE: IJPN) which I own via my self-invested personal pension is by far the largest. But while this is London's most heavily traded Japan ETF and consistently has the lowest bid-offer spread (the gap between the buying and selling price), it charges 0.59% a year.

Two cheaper funds, Amundi's (LSE: CJ1) and HSBC's (LSE: HMJP), track the same index for 0.45% and 0.4% respectively, and also offer decent liquidity, but keep an eye on bid-offer spreads.

If you prefer a currency-hedged tracker, which shields against a falling yen, the sterling-hedged MSCI Japan index has returned 43% in the year to date, against 23% for the unhedged version. You pay more for these: 0.64% a year for the iShares' MSCI Japan Monthly GBP Hedged (LSE: IJPH), for example. This fund and one from db x-trackers (LSE: XMJG) also have wider spreads than unhedged versions.

Lastly, don't forget small caps. The MSCI Japan Small Cap index is tracked by funds from iShares (LSE: ISJP) and Credit Suisse (LSE: CJPS), charging 0.59% and 0.58%, respectively.

Paul Amery edits www.indexuniverse.eu, the top source of news and analyses on Europe's ETF and index-fund market.