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The Nikkei 225 Stock Average is Japan’s primary stock index and a barometer of the Japanese economy. Similar to the Dow Jones Industrial Average, it includes the top 225 blue-chip companies listed on the Tokyo Stock Exchange.
Although international traders cannot invest directly in the index, they can gain exposure to the underlying stocks within the Nikkei 225 via an exchange-traded fund (ETF). This is the simplest way to invest in Japanese stocks.
Key Takeaways
- The Nikkei 225 Stock Average, Japan’s primary stock index, tracks the performance of 225 large Japanese companies.
- The Nikkei 225 includes well-known companies like Canon, Sony, Toyota, and Mazda.
- Like the Dow Jones Industrial Average, the Nikkei 225 Stock Average is a price-weighted equity index.
- Although it is impractical for international investors to buy all 225 stocks in the index, you can gain exposure through an index ETF.
- U.S. investors can also gain exposure by investing in Nikkei 225 futures.
Understanding the Nikkei 225
Like the Dow Jones Industrial Average, the Nikkei 225 Stock Average is a price-weighted equity index. The ranking of companies is determined by stock price, which differs from other major indexes where market capitalization is used in calculations.
Calculated since September 1950 (retroactively to May 1949), it is Asia’s oldest index and is also commonly referred to as the Nikkei 225, the Nikkei Index, and the Nikkei. The index is reviewed annually in September, and any changes are implemented in October.
While it is not practical to buy all 225 companies represented on the index, you can gain exposure to the Nikkei 225 through an index mutual fund or ETF.
The industry sectors represented on the index include technology, financials, consumer goods, materials, capital goods, transportation, and utilities. In all, the Nikkei index comprises companies from 36 different industries.
Some of the well-known companies represented on the index include Canon, Panasonic, Sony, Nissan, Toyota, Mazda, and Honda.
Exchange-Traded Funds (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, just like stock prices. Like mutual funds, ETFs offer diversification through a single investment. They have lower expenses than actively managed funds.
Several ETFs that track Japanese indexes trade on U.S. exchanges, though none for the Nikkei 225. In addition, U.S. investors can also get direct exposure by investing in Nikkei 225 futures contracts on the CME.
Fast Fact
In addition to buying ETFs, you can also gain exposure to the Nikkei 225 by buying index futures.
Investing Through Japanese ETFs
Most of the 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, and Daiwa Asset Management’s Daiwa ETF Nikkei 225.
To trade these ETFs, you must open an account with a brokerage that lets you buy and sell investments not listed on a U.S. exchange. Fidelity Investments is one of 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, exposing you to currency risk. In addition to monitoring the performance of the Nikkei 225, you must consider exchange rate fluctuations between the yen and your local currency.
The United Kingdom, France, Germany, Switzerland, Italy, and Singapore also offer ETFs that track the Nikkei 225. Some of them are cross-listed on the Tokyo Stock Exchange.
Performance of the Nikkei 225
The Nikkei 225 does not reflect how most stock averages tend to steadily and exponentially grow. On Dec. 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 8,605.15—a drop of 1,015 points.
The index continued to fall during that entire year, hitting a low of 8,160.01 on Nov. 25. That year, the Nikkei dropped more than 17%, finishing at 8,455.35, representing the lowest year-end price in over 30 years.
In 2024, the Nikkei finally beat its previous high of 1989 to reach 42,224.02 on July 11, 2024. As of July 25, 2024, the Nikkei 225 was at 37,869.51.
Can I Invest in the Nikkei 225 From the U.S.?
You can’t invest directly in the Nikkei 225 from the U.S. However, you can gain exposure to this index by buying shares of an ETF that tracks the Nikkei. You can also buy Nikkei 225 futures.
What ETF Tracks the Nikkei 225?
There are several ETFs track the Nikkei 225, but most trade on the Japanese market. These include the Daiwa Asset Management ETF and the iShares Core Nikkei 225 ETF. However, most large U.S. brokers can facilitate trades in international investments.
How Do You Invest in Japanese Stocks?
If you don’t live in Japan, the best way to gain exposure to Japanese companies is through American Depository Receipts (ADRs) or exchange-traded funds. You may be able to open an account with an international brokerage, but this may require you to provide proof of residency in Japan, such as a Japanese driver’s license or permanent resident certificate.
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. Although most of the ETFs that track the index are domiciled in Japan, there are many U.S. brokers that allow international trades.
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