NEW YORK ( TheStreet) -- The outlook for Japan's economy is far from perfect and the country has several issues confronting it, such as large government debt, an aging population, and persistent deflation. However, the country's annualized GDP figure though for the fourth quarter of 2009 was recently reported to be the best figure since the first quarter of 2008, signaling an improved economic outlook for the world's second largest economy. Even better, these ETFs are among the best performing international ETFs in 2010, with small gains compared to losses for many European and emerging market ETFs. Investors that want exposure to Japan should know what their choices are and here are the best fund options for three different strategies of investing in Japan.
For an investment strategy with exposure to Japanese small caps, there are some ETF choices such as iShares MSCI Japan Small Cap ( SCG), but none of them trade with sufficient liquidity. A better choice for investors interested in small caps is a mutual fund called Fidelity Japan Smaller Companies Fund ( FJSCX). This mutual fund has a higher expense ratio than its ETF peers but it is lower than its mutual fund equivalents. It also had much better performance in the past year in comparison to the three Japanese small cap ETFs. Like EWJ, FJSCX is largely comprised of consumer discretionary, financial, industrial, and information technology companies, with these four sectors accounting for 83.4% of the fund as of Dec. 31, 2009. Mutual funds generally have less transparency than ETFs, and this lack of transparency is one reason why many investors have moved out of mutual funds and into ETFs in 2009. For a small-cap investment strategy on Japan though, FJSCX is still the best choice for now.
ETF investors have four options for playing a continued strengthening of the yen against the dollar, but the only liquid choice is CurrencyShares Japanese Yen Trust ( FXY). The other three ETF choices to go long on the Japanese yen against the dollar do not trade with sufficient volume. To summarize, for investors interested in Japan, the best large cap option is EWJ, the best small-cap choice is FJSCX, and the best currency fund is FXY. -- Written by Don Dion in Williamstown, Mass.