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Guide to Japan ETFs

Stocks in this article: EWJ TM SNE

NEW YORK ( TheStreet) -- ETF investors have a slew of options when it comes to Japan and ex-Japan exposure, but the island's tepid performance in the past year hasn't attracted that many investors, meaning several ETFs, including most leveraged ETFs, have very low volume.

However, Japan may be of more interest in the future. It was reported last week that the Japanese economy grew at an annualized pace of 4.9% in the first quarter of this year.

The growth of Japan's economy is promising as demand for its exports is becoming more diversified. Last year, China overtook the United States as the number one destination for Japanese goods shipped abroad.

There are also signs that Japan's domestic economy is picking up as household spending increased at an annualized rate of 1.3% in the first quarter of this year.

For exposure to the Japanese economy, the most heavily traded ETF that provides investors with access is iShares MSCI Japan Index (EWJ).

EWJ is filled with large-cap Japanese companies and its top ten holdings feature familiar names such as Toyota (TM), Sony (SNE) and Canon (CAJ). The ETF has more than 325 holdings, meaning that a lack of diversity among companies is not a concern with this fund.

From a sectoral standpoint, EWJ is also well distributed. The four sectors with the largest distribution of net assets from largest to smallest are consumer discretionary, industrials, financials and information technology.

For investors who want to take a small-cap approach to Japan, the most liquid option is WisdomTree Japan Small Cap Dividend (DFJ). There are two other options for small-cap exposure in SPDR Russell/Nomura Small Cap Japan (JSC) and iShares MSCI Japan Small Cap Index Fund (SCJ), but their low trading volumes raise liquidity concerns.

In the large-cap spectrum of funds, there are many alternatives to EWJ but most of them trade with low volume.

One that trades with a fair amount of volume and offers investors a unique approach to the Japanese markets is WisdomTree Japan Hedged Equity (DXJ).

Unlike EWJ, DXJ gives investors the ability to gain exposure to Japanese markets while hedging their investment against currency fluctuations.

Foreign equity ETFs such as EWJ that do not hedge against currency movements will change in value based on the share movements of their holdings plus the change in the value of the country's currency against the U.S. dollar. For instance, if the yen increases in value against the dollar by 5% in a month, EWJ will increase by 5%, plus or minus the performance of its underlying holdings.

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