What is a Yen ETF?

An exchange-traded fund (ETF) that follows the relative value of the Japanese yen (JPY) in the foreign exchange (forex) market is referred to as a yen ETF. A single currency or a basket of several currencies is used for this.

Yen ETFs may keep the spot currency in interest-bearing accounts or invest primarily in yen-backed assets, such as bonds and short-term debt instruments. Without FX account requirements, investors may have exposure to and access to the yen by investing in yen ETFs.

How Yen ETFs Work

In the past, purchasing and selling foreign currency required creating a foreign exchange account, which was a complex procedure. It was a luxury usually accorded to seasoned dealers with in-depth expertise. However, ETFs contributed to this shift, opening the forex market to regular investors.

Pre-packaged investments, known as currency exchange-traded funds (ETFs), are designed to follow certain currencies in the same manner that conventional ETFs aim to mimic an index’s performance. These vehicles trade on a stock market as stocks do, and when traders buy and sell them throughout the day, their prices alter.

Yen exchange-traded funds (ETFs) monitor the performance of the Japanese yen versus a basket of currencies or against a single currency, such as the euro or US dollar. Like other currency ETFs, these investments provide investors with simple, cost-effective access to trading currencies throughout the trading day. They may be used to protect against significant economic shocks or to take advantage of arbitrage possibilities. They also enable investors to diversify their holdings.

Debt securities, money market funds, cash deposits, and futures contracts denominated in yen are standard components of yen exchange-traded funds (ETF) portfolios. Investors in these funds get income from the yen’s performance relative to other currencies and interest on certain assets in the portfolio. Some yen ETFs have a dividend yield matching the current income from yen assets. Others use that revenue to pay for the ETF’s management costs.

VettaFi (previously ETF Database) lists three JPY ETFs traded in the US.

Particular Points to Remember

Those who own exchange-traded funds (ETFs) that track the value of the yen or any other currency should monitor any significant economic news that might impact their holdings. When investing in coins, these include the publication of the GDP, retail sales, industrial output, inflation, trade balances, employment data, interest rates, and the daily news flow about central bank meetings.

When assessing a foreign currency’s relative attractiveness, one should consider interest rates, inflation, and the nation’s equity market performance.

Meager inflation and low interest rates have traditionally made the yen appealing as a carry trade for investors in Japan.

Because of these low interest rates, borrowing money in yen to finance taking on risk in other currencies with higher interest rates is comparatively inexpensive.

Investors may also think about the Tankan survey. The Bank of Japan (BOJ) releases Tankan, an economic study of Japanese companies, every quarter. It influences trading in Japanese stocks and currencies since it is used to create monetary policy.

Inflation, interest rates, political stability, and a country’s economic situation account for most currency market movements.

Benefits and Drawbacks of Yen ETFs

Investing in yen ETFs has several clear advantages and disadvantages, some of which also apply to other currency ETFs.

Advantages

Investors may safeguard themselves against a drop in the value of their currency by making foreign exchange investments. Many people have chosen the yen over the years, the world’s third most traded currency after the US dollar and the euro.

In Asia, it is also the currency that is exchanged the most.

The yen is sometimes employed to create diversity because it moves inversely with other significant currencies, like the US dollar. The money has gained a reputation as a haven and is often utilized as a reserve currency in cross-border transactions.

The fact that Japan is the world’s biggest creditor should also be considered.

In times of adversity, traders also hold the widely held opinion that investors there tend to sell their overseas assets and return their money home, which supports the demand for the yen and its price.

Disadvantages

Some investors believe currency ETFs to be dangerous. Even in stable countries like Japan, macroeconomic developments impact currency prices globally. Unpredictable natural catastrophes may also have a significant effect; the Fukushima accident in 2011 is one example that led to a rise in the yen value and a subsequent recession.

A few commentators have questioned the safe-haven character of the Japanese yen, citing the following problems:

• Japan’s imbalances in trade
• Local asset managers purchase overseas assets with better yields
• Japanese businesses need more respectable domestic capital deployment choices.

The yen’s appeal as a go-to for trade has diminished somewhat as major countries increasingly adopt low-interest rates.

These insights should act as a warning to those who need clarification on trading forex. Traders need to be aware of the leading foreign exchange rates and keep up with not only the country’s current economic statistics but also the fundamentals of each country’s economy and any unique elements that may affect the value of the currency, such as changes in interest rates or the movement of commodities.

Pros:

• Guards against drops in the domestic currency
• Let investors spread their bets.
• The world’s most significant creditor is Japan.

Cons:

• The yen is prone to macroeconomic dangers.
• Uncertainty about safe-haven status
• Diminished in popularity as a carry trade

ETF examples in the yen

With $226.3 million in assets under management (AUM) as of October 2023, the Invesco CurrencyShares Japanese Yen Trust (FXY) is the most well-liked yen exchange-traded fund (ETF). FXY, which debuted in February 2007, aims to replicate the yen’s value and the US dollar’s performance. It does this by keeping the yen in reserve. The fund’s cost-to-income ratio is 0.40%.

A few more choices are available to investors who want to include yen ETFs in their portfolios. ProShares Ultra Yen ETF (YCL) and ProShares UltraShort Yen ETF (YCS) are alternatives. However, it should be noted that the latter is an inverse ETF, while the former is a leveraged ETF.

How is yen investable?

Japanese yen ETFs are the most straightforward option for a regular investor to acquire the yen.

Which ETF is the primary one for trading the Japanese yen?

The Invesco CurrencyShares Japanese Yen Trust (FXY) is the most popular yen ETF with actual yen in its account.

ProShares provides two more yen exchange-traded funds (ETFs): the ProShares Ultra Yen ETF (YCL) and the ProShares UltraShort Yen ETF (YCS). However, these two choices are levered. The YCS offers a twofold inverse exposure to the yen, while the YCL offers a twofold long exposure.

How can I make Nikkei investments?

Through an ETF, American investors may purchase shares in Japan’s main stock index, the Nikkei 225 index. These consist of:

• iShares Core Nikkei 225 ETF
• Xtrackers Nikkei 225 UCITS ETF

Conclusion

• The value of the Japanese yen relative to a single or a basket of other currencies is tracked via an exchange-traded fund (ETF) called the yen.
• The ETF minvestsin cash deposits, money market funds, futures contracts, and debt instruments, primarily hn yen.
• While some yen exchange-traded funds (ETFs) utilize the dividend yield from their yen assets to match their current income, others use the revenue to cover the ETF’s management costs.
• Leveraged yen ETFs are another option; they provide two times the long or short exposure to changes in the USD/JPY.
• Since the yen has always been seen as a haven, investors have gravitated toward it during periods of elevated global danger.