Meaning, Pros and Cons, Examples

What Is a Yen ETF?

The term yen ETF refers to an exchange-traded fund (ETF) that tracks the relative value of the Japanese yen (JPY) in the foreign exchange (forex) market. This is done against a single currency or against a basket of other currencies.

Yen ETFs invest primarily in yen-backed assets, including short-term debt instruments and bonds, or simply hold the spot currency in interest-bearing accounts. Investing in a yen ETF gives investors exposure and access to the yen without the need for forex accounts.

How Yen ETFs Work

Buying and selling foreign currencies was traditionally a complicated process that involved opening up a foreign exchange account. It was a privilege generally reserved for experienced traders with expert knowledge. But ETFs helped change that, making the forex market more accessible to the average investor.

Currency ETFs are pre-packaged investments tasked with tracking specific currencies in the same way that regular ETFs seek to replicate the performance of an index. Like stocks, these vehicles trade on a stock exchange and their prices fluctuate throughout the day as traders buy and sell them.

Yen ETFs track the performance of Japan’s currency relative to a single currency (like the U.S. dollar or euro) or against a basket of currencies. Like other currency ETFs, these investments give investors easy and affordable access to trade currencies during the trading day. They also allow investors to diversify their portfolios and can be used to benefit from arbitrage opportunities or to hedge against major economic events.

The portfolios of yen ETFs usually include yen-denominated futures contracts, debt securities, money market funds, and cash deposits. These funds generate income for investors through the performance of the yen against other currencies as well as through interest generated by some securities in the portfolio. Some yen ETFs match the current income earned on the yen assets with a dividend yield. Others use that income to pay the expenses of managing the ETF.

Special Considerations

Investors who hold yen ETFs (or any other currency ETF for that matter) should keep tabs on all major economic data that affect their investments. This includes the release of gross domestic product (GDP), retail sales, industrial production, inflation, trade balances, employment figures, interest rates, including scheduled meetings of the central bank, and the daily news flow when investing in currencies.

Interest rates, inflation, and the country’s equity market performance should also be taken into account when evaluating the relative attractiveness of a foreign currency. When it comes to Japan and yen traders, very low inflation and low interest rates make the currency historically attractive as a carry trade. These low interest rates make it relatively cheap to borrow in yen to fund risk-taking in other currencies that carry higher interest rates.

The Tankan survey is also something that investors may want to consider. Tankan, which is an economic survey of Japanese businesses, is published by the Bank of Japan (BOJ) every quarter. It is used to formulate monetary policy and, as a result, often moves trading in Japanese stock and currency.

Advantages and Disadvantages of Yen ETFs

There are several obvious benefits and drawbacks to investing in yen ETFs—some of which also apply to other currency ETFs as well.

Advantages

Investing in foreign currencies enables investors to protect themselves in case their own currency declines in value. Over the years, many have opted for the yen, which is the third-most widely traded currency globally behind the U.S. dollar and the euro. It is also the most widely traded currency in Asia.

The yen is sometimes used to provide diversification, as it frequently trades inversely to other major currencies in relation to the U.S. dollar. The currency is often used as a reserve currency in international transactions and has even developed a reputation as a safe haven.

Another factor to consider is that Japan is the world’s largest creditor. There’s also a popular belief among traders that investors there tend to dump foreign holdings and bring their money back home in times of hardship, bolstering demand for the yen and, subsequently, its valuation.

Disadvantages

Some investors consider currency ETFs risky. That’s because macroeconomic events affect currency values around the world, even in stable nations such as Japan. Unpredictable natural disasters can also have a big impact, an example being the Fukushima disaster in 2011, which caused a surge in the value of the yen, followed by a recession.

A handful of analysts have questioned the Japanese yen’s safe-haven status, pointing to the following issues:

• Japan’s trade deficits
• Local asset managers buying higher-yielding foreign assets
• Japanese companies running out of decent options to deploy capital at home

The yen has also lost some of its luster as a popular carry trade as low-interest rates become commonplace among major economies.

These observations serve as a reminder that forex trading is not a market for the unprepared. Traders must be knowledgeable about major foreign currencies and stay abreast of not only the current economic stats for a country but also the underpinnings of the respective economies and the special factors that can influence the currencies, such as commodity movement or interest rate changes.

Examples of Yen ETFs

The most popular yen ETF is the Invesco CurrencyShares Japanese Yen Trust (FXY) with $279.2 million in assets under management (AUM) as of December 2023. FXY was launched in February 2007 and seeks to mirror the price and performance of the yen relative to the USD. It does this by holding yen on deposit. The fund has an expense ratio of 0.40%.

Investors looking to add yen ETFs to their portfolios have a couple of other options, too. Alternatives include the ProShares Ultra Yen ETF (YCL) and ProShares UltraShort Yen ETF (YCS). One thing to note, though, is that these two are leveraged ETFs, with the latter being an inverse ETF.

The Bottom Line

A yen ETF invests in bonds and other instruments that reflect the value of the Japanese currency in the foreign exchange markets. In the past, low inflation rates have made the yen attractive to some currency traders, although some traders consider currency ETFs to be too risky.