The Yen ETF: A Screaming Buy for Long-Term Investors


yen etf

Importance of Yen ETF in the financial market:

Updated April 30. 2024


In recent years, the Japanese Yen ETF has emerged as an essential financial instrument, offering investors a convenient and cost-effective way to gain exposure to the Japanese currency. As the world’s third-largest economy, Japan’s economic trends and monetary policy decisions can significantly impact global markets. Yen ETFs allow investors to profit from these dynamics without the complexities of directly trading currencies.

However, investing in Yen ETFs is not without risks. The yen has experienced significant volatility in recent years, influenced by factors such as diverging monetary policies between the U.S. and Japan, geopolitical tensions, and shifting economic fundamentals. In 2023, Japanese authorities faced pressure to combat the yen’s sustained depreciation as it slid to a one-year low against the dollar.

As legendary trader Jesse Livermore once said, “There is only one side to the stock market, and it is not the bull or bear sides, but the right side.” Successful investing in Yen ETFs requires a deep understanding of the underlying currency dynamics, the ETF’s structure and risks, and the ability to capitalize on mispricings and opportunities as they arise.


 What are Yen ETFs?

Yen ETFs are investment funds that track the performance of the Japanese yen relative to other currencies. They expose the yen by investing in yen-denominated assets like Japanese stocks, bonds, and currency futures. Yen ETFs allow investors to profit from the yen’s movements without directly trading currencies.

How Yen ETFs Work

– Yen ETFs buy a portfolio of yen-denominated assets to mirror yen returns
– The ETF’s value depends on the performance of the underlying yen assets
– Yen ETFs charge management fees which reduce investor returns
– They trade on exchanges like stocks, providing liquidity and convenience

As Warren Buffett says, “Price is what you pay, value is what you get.” Investors must weigh the fees and costs of Yen ETFs against the value and diversification they provide.

 Buffett’s Yen Investments

Warren Buffett has recently made significant investments in Japan through his company, Berkshire Hathaway. Some key points:

– In 2020, Berkshire disclosed $6 billion stakes in five Japanese trading houses
– Buffett issued yen-denominated bonds to fund the purchases, taking advantage of Japan’s ultra-low interest rates
– Charlie Munger called it “awfully easy money” and compared the opportunity to a “gift from God” due to the minimal risk and attractive returns
– Buffett likes that the trading houses earn profits in dollars while the debt is in yen, providing a currency hedge

Buffett’s moves demonstrate how to capitalize on undervalued assets and favourable currency dynamics. Jesse Livermore said, “There is only one side to the stock market, and it is not the bull or bear sides, but the right side.”

Yen ETFs offer investors a way to gain exposure to the Japanese yen and potentially profit from its movements. However, investors must carefully consider the fees, risks, and opportunity costs involved. As Buffett and Munger have shown, capitalizing on mispricings between currencies and assets can generate strong, low-risk returns for the discerning investor. Ultimately, focusing on value and having the patience to wait for the right opportunities is key to success.

Diversification and Hedging

Yen ETFs provide exposure to the Japanese yen, helping diversify portfolios heavily weighted in U.S. dollar assets. They can also hedge against currency risk for investors with Japanese stocks or bonds. Robert Minter, director of ETF investment strategy at Aberdeen, notes that “gold demand has increased as foreign central banks diversify away from U.S. dollars and Treasurys in favour of gold to lower the influence of U.S. foreign policy.” Similarly, Yen ETFs offer a way to reduce dependence on the U.S. dollar.

Potential Returns and Accessibility

Yen ETFs have the potential to generate strong returns if the yen appreciates significantly against other major currencies. They provide an accessible way to gain yen exposure without forex trading accounts. The Invesco CurrencyShares Japanese Yen Trust (FXY) is a popular physically-backed yen ETF. ProShares offers leveraged options, with the Ultra Yen ETF (YCL) providing 2x long exposure and the UltraShort Yen ETF (YCS) providing 2x inverse exposure.

Portfolio Construction

Experts suggest various ways to incorporate Yen ETFs into a diversified portfolio:
– An intermediate approach using about 8 ETFs, including a core bond ETF, international bonds, large-cap U.S., small-cap U.S., and emerging markets
– Using just two ETFs – an all-country stock index like the MSCI ACWI for equity exposure, combined with a bond ETF, allocated based on risk tolerance
– Adding Yen ETFs to a mix of stocks, bonds, commodities, and real estate for a diversified all-ETF portfolio

As Brian Koble, CIO at Hefren-Tillotson, recommends the T. Rowe Price Spectrum Income Fund (RPSIX) for broad bond exposure, a Yen ETF could be valuable for currency diversification.

 Risks and Considerations

While Yen ETFs offer diversification benefits, it’s essential to understand the risks. The yen can be volatile, influenced by economic trends, monetary policy, and geopolitical events. Over-concentrating in any one asset class or currency can undermine diversification, as seen with tech stocks in the early 2000s. Investors should consider their overall asset allocation and risk tolerance when considering Yen ETF exposure.

In summary, Yen ETFs provide a liquid, transparent, low-cost way to diversify with yen exposure. By combining them with other asset classes in a thoughtful portfolio construction approach, investors can potentially enhance returns and manage risk per their objectives. However, as with any investment, thorough due diligence on the specific ETFs and an understanding of the risks is essential.


List of Yen ETFs

A comprehensive List
iShares Currency Hedged MSCI Japan ETF (HEWJ)
WisdomTree Japan Hedged Equity Fund (DXJ)
ProShares Ultra Yen ETF (YCL)
Invesco CurrencyShares Japanese Yen Trust (FXY)
Deutsche X-trackers MSCI Japan Hedged Equity ETF (DBJP)
iPath JPY/USD Exchange Rate ETN (JYN)
ProShares Short Yen ETF (YCS)
WisdomTree Japan SmallCap Dividend Fund (DFJ)
iShares MSCI Japan ETF (EWJ)
First Trust Japan AlphaDEX Fund (FJP)

 Historical Performance

Yen ETFs have delivered mixed results historically. The WisdomTree Bloomberg Japanese Yen Bullish Fund (JYN) has returned -0.27% annually since its 2006 inception, while the Invesco CurrencyShares Japanese Yen Trust (FXY) has returned -2.47% annually since 2007. However, during periods of market turmoil, the yen’s safe-haven status has led to solid returns. In 2008, FXY gained 23.5% as investors fled to safety during the financial crisis.

Current Trends
The yen has been trading at multi-year lows against the U.S. dollar, with the USD/JPY exchange rate reaching 134 in 2023, its highest level since 2002. The weakness is attributed to the Bank of Japan’s ultra-loose monetary policy diverging from the Federal Reserve’s tightening cycle. However, some experts see an opportunity in the yen’s undervaluation. Lyn Alden, a renowned macro strategist, notes that the yen is “the most undervalued currency in the world” based on purchasing power parity.

Contrarian Opportunity
From a contrarian perspective, the yen’s oversold condition may present a compelling long-term investment case. Ray Dalio, founder of Bridgewater Associates, has highlighted the potential for a global “paradigm shift” where the U.S. dollar loses its reserve currency status. In such a scenario, the yen could appreciate significantly as a safe-haven alternative. Dalio suggests that “the yen is attractive” as part of a diversified portfolio.

Future Outlook

The future outlook for Yen ETFs is mixed. While the yen’s undervaluation and potential safe-haven demand provide a bullish case, Japan’s demographic challenges and low-growth environment may limit upside potential. However, a shift in the Bank of Japan’s monetary policy or a weakening U.S. dollar could catalyse yen appreciation. As with any investment, thorough due diligence and a long-term perspective are essential.



In summary, Yen ETFs offer an alternative way to diversify portfolios and potentially capitalize on the yen’s undervaluation. While historical returns have been mixed, the current oversold condition and potential for a global paradigm shift make Yen ETFs an intriguing contrarian bet. However, investors must carefully weigh the risks and consider their overall asset allocation strategy before investing. As Warren Buffett famously said, “Be fearful when others are greedy, and greedy when others are fearful.”

The yen’s status as a safe-haven currency and Japan’s position as the world’s largest creditor nation provide a compelling long-term investment case. In times of global uncertainty, investors often flock to the yen, increasing its value. This was evident during the 2008 financial crisis when the Invesco CurrencyShares Japanese Yen Trust (FXY) gained 23.5% as investors sought safety.

Moreover, the Bank of Japan’s yield curve control policy has kept Japanese government bond yields anchored near zero, while yields in other developed markets have risen. This divergence has made the yen more attractive for carry trades, where investors borrow in low-yielding currencies to invest in higher-yielding assets. As global yields normalize, the yen could appreciate as carry trades unwind.

However, investors must also consider the risks associated with Yen ETFs. Japan’s ageing population, high government debt, and persistent deflation pose long-term economic challenges. Additionally, any shift in the Bank of Japan’s monetary policy or geopolitical tensions in the region could lead to volatility in the yen’s value.

Therefore, investors should view Yen ETFs as a tactical allocation within a well-diversified portfolio rather than a core holding. By combining Yen ETFs with other asset classes and currencies, investors can potentially enhance risk-adjusted returns and navigate various market conditions.

In the words of legendary investor Jim Rogers, “I believe that if you want to be successful at investing, you should invest only in what you have a wealth of knowledge about.” Before investing in Yen ETFs, investors should thoroughly research the underlying currency dynamics, the ETF’s structure, and the potential risks and rewards. By doing so, they can make informed decisions and capitalize on opportunities in the ever-changing global financial markets.


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