How to Invest in the Nikkei 225

The Nikkei 225 Stock Average is Japan’s primary stock index and a barometer of the Japanese economy. It gauges the behavior of 225 large Japanese companies, covering a broad swath of industries. Broadly considered to be Japan’s equivalent to the Dow Jones Industrial Average, it includes the top 225 blue-chip companies listed on the Tokyo Stock Exchange.

Although you cannot invest directly in an index, you can gain exposure to the underlying stocks within the Nikkei 225 via an exchange traded fund (ETF).

Performance Background

The Nikkei 225 does not accurately reflect how stock averages tend to steadily and exponentially grow. On December 29, 1989, the Nikkei achieved a historic high of 38,957.44 intraday, before closing at 38,915.87. Throughout that entire decade, although the Nikkei grew sixfold, it dropped those gains. Notably, on March 10, 2009, the Nikkei closed at 7,054.98—a whopping 81.9% below its 1989 peak.

Two working days after a giant earthquake rattled the northeast section of Japan on March 15, 2011, the Nikkei plummeted more than 10%, to 8605.15—a drop of 1,015 points. The index continued to fall during that entire year, hitting a low of 8160.01 on November 25. That year, the Nikkei dropped more than 17%, finishing at 8455.35, representing the lowest year-end price in over 30 years.

As of May 18, 2021 the Nikkei 225 was at 28,406.84.

Additional Background

Like the Dow Jones Industrial Average, the Nikkei 225 Stock Average is a price-weighted equity index. Ranking of companies is determined by stock price, which differs from other major indexes where market capitalization is used in calculations.

Calculated since September of 1950 (retroactively to May of 1949), it is Asia’s oldest index and also commonly referred to as the Nikkei 225, Nikkei Index, and the Nikkei. The index is reviewed annually in September, and any changes are implemented in October.

Holdings

Some of the well-known Japanese companies in the Nikkei 225 are Canon Inc. (CAJ), Panasonic Corp. (PCRFY), Sony Corp. (SNE), Nissan Motor Co. (NSANY), Toyota Motor Corp. (TM), Mazda Motor Corp. (MZDAY), and Honda Motor Co. (HMC). Sectors represented in the index include technology, financials, consumer goods, materials, capital goods, transportation, and utilities. In all, the Nikkei index comprises companies from 36 different industries.

ETFs

Buying and managing each individual stock in the Nikkei 225 is costly and impractical, with substantial tax implications. Individual investors can gain exposure through exchange-traded funds (ETFs), whose underlying assets correlate to the Nikkei 225.

Unlike mutual funds, which are priced at the end of the day, ETFs trade throughout the day, consequently their prices fluctuate like stocks. Like mutual funds, ETFs offer diversification through a single investment. They have lower expenses than actively managed funds.

Japanese ETFs

Several ETFs that track the Nikkei 225 trade on the Tokyo Stock Exchange. They include Blackrock Japan’s iShares Nikkei 225 ETF, Nomura Asset Management’s Nikkei 225 Exchange Traded Fund (NTETF), and Daiwa Asset Management’s Daiwa ETF Nikkei 225.

To trade these ETFs, one must open an account with a brokerage that lets them buy and sell investments not listed on a U.S. exchange. Fidelity Investments and E*Trade Financial Corp. (ETFC) are among the discount brokers that offer international trading accounts.

Bear in mind that trading ETFs in their local markets has complications. Tokyo Stock Exchange-listed ETFs are denominated in yen. In addition to monitoring the performance of the Nikkei 225, one must consider exchange rate fluctuations between the yen and dollar.

The United Kingdom, France, Germany, Switzerland, Italy, and Singapore also offer ETFs that track the Nikkei 225, some of which are cross-listed on the Tokyo Stock Exchange.

The Bottom Line

If you seek broad exposure to the Japanese stock market through investments whose underlying assets track the Nikkei 225, ETFs may be the way to go. In particular, the U.S.-listed, dollar-denominated MAXIS Nikkei 225 Index ETF offers immense value and diversification potential.