Japan ETF Captures Companies with Strong Governance Principles

As more investors consider the benefits of environmental, social and governance principles along with the broader socially responsible investment theme, one may consider a Japan country-specific ETF to diversify his or her portfolio.

Specifically, investors may look to the Xtrackers Japan JPX-Nikkei 400 Equity ETF (NYSEArca: JPN), which tracks the JPX-Nikkei 400 Index.

The JPX-Nikkei 400 Index was launched in January 2014 as a means of reinvigorating the Japanese equity market. The JPX-Nikkei 400 Index employs a rigorous screening process based on return on equity, cumulative operating profit and market capitalization to select high-quality, capital-efficient Japanese companies.

“The Nikkei 400 has quietly become one of the most followed Japanese indices, with little realizing that it technically falls into ESG,” Luke Oliver, DWS Managing Director, Head of Index Investing, Americas, told ETF Trends. “Really this is a G for governance with index inclusion based on positive corporate governance and behavior, efficient use of capital and investor focus.”

Three Broad Categories

The three ESG factors cover three separate broad categories. The governance factor is based on screens for executive pay, bribery, and corruption, political lobbying and donations, board diversity and structure, tax structure.

This Nikkei 400 also gained fame after the Bank of Japan bought alternative index-based funds as part of its quantitative easing measure to bolster the Japanese markets. The central bank has acquired Japan-listed ETFs that track the JPX-Nikkei 400 Index, which also serves as the underlying benchmark for JPN.

Related: 4 Japan ETFs May Be a Bargain Play 

“Lead by huge investors such as the GPIF, inflows in Nikkei 400 ETFs have soared, especially during the era of Abenomics. Nikkei 400 ETFs make up the largest ‘ESG’ ETFs in global markets, though a purist might say they’re skewing the numbers, as they are more focused on Governance),” Oliver added.

JPN covers 399 companies and comes with a cheap 0.09% expense ratio. The ETF includes large tilts to industrials 23.4%, consumer discretionary 16.4% and information technology 14.6% sectors, and its largest positions include Sony 1.6%, Toyota 1.6%, Mitsubishi UFJ Financial Group 1.6%, Keyence 1.6%, and Nippon Telegraph & Telephone 1.5%.

For more information on the Japanese markets, visit our Japan category.