Every major stock exchange, whether it’s the London Stock Exchange (LSE) with its FTSE 100, or the New York Stock Exchange and the Dow Jones, has its own underlying index that allows investors to speculate on the wider economy, rather than just single stocks.
In the case of the Nikkei 225, this is the properiatory index that tracks the Tokyo Stock Exchange.
In our comprehensive ‘What is the Nikkei 225 Index’ guide, we’ll cover all of the main points that we think you might want to know.
This will include an overview of the Tokyo Stock Exchange itself, as well as a discussion on how an index works. Moreover, we’ll also explore what types of companies make the Nikkei 225 Index, and how the index is calculated.
Let’s start by quickly covering the Tokyo Stock Exchange.
The Tokyo Stock Exchange
Launched back in 1950, the Tokyo Stock Exchange is the largest stock exchange in Japan, and the fourth largest in the world by market capitalization. Located in the capital city of Tokyo, the stock exchange lists more than 3,500 companies across multiple industries. This includes some of Japan’s biggest brands, notably Honda, Mitsubishi and Toyota.
Much like in the case of other major stock exchanges, the Tokyo Stock Exchange bridges the gap between corporations and investors. Through the use of real-time electronic tracking, the exchange details the current trading prices available on each of the companies it lists.
Outside of conventional equities, the Tokyo Stock Exchange also lists a number of other financial securities. This includes options and futures, derivatives and ETFs.
The great thing about the Tokyo Stock Exchange is that it has a number of indexes that allows investors to speculate on the market in its entirety, rather than backing specific companies.
As we will discuss below, the most-established of these indexes is the Nikkei 225.
What is the Nikkei 225?
In its most basic form, the Nikkei 225, or simply the ‘Nikkei’, is a mechanism that tracks the performance of the Tokyo Stock Exchange. It is important to recognize that because there are now more than 3,500 individual companies listed on the main Tokyo Stock Exchange, the Nikkei instead tracks a limited number of equities. The reasons for this are twofold.
First and foremost, tracking the performance of more than 3,500 companies would be a logistical nightmare, especially when one considers the amount of trading that occurs on a daily basis. However, and perhaps more importantly, the vast majority of the Japanese stock marketplace is dominate by the companies sat at the very top of the market capitalization rankings.
As such, it wouldn’t make sense to include smaller organizations on the main index, not least because their effect on the health of the wider economy is less notable.
Therefore, and as the name suggests, the Nikkei 225 includes 225 of Japan’s biggest companies. In order to determine what companies to list, the Nikkei will typically select its constituents by the size of their market capitalization. However, this only includes blue-chip companies, and thus, excludes the likes of ETFs and other non-equity based securities.
At the very top of the Nikkei, market capitalizations are dominated by Toyota Motor Corporation, SoftBank Group and NTT Docomo, which at the time of writing have a total cap of 21T Yen, 11T Yen and 8T Yen, respectively. For those not familiar with the Yen, that amounts to GBP£270 billion or US$357 billion.
So now that you have a better understand of what the Nikkei 225 actually is, in the next section we’ll take a look at how the index has performed historically.
How has the Nikkei 225 Performed Historically?
The historical performance of the Japanese stock exchange and thus, the Nikkei 225 index, is potentially one of the most interesting talking points with respect to major indexes. For those unaware, in the mid-to-late 1980s, the Japanese economy experienced one of the biggest financial bubbles that the world has ever seen.
If you thought the bubbles of the Dot.com boom of the late 1990s or the housing market crash of 2008 were bad, nothing gets close to what Japan experienced. In fact, to give you an idea as to just how artificial the bubble was, in the 15 years prior to 1990, the Nikkei stock index increased by more than 900%.
One of the key drivers to this artificial boom was that real estate prices in Japan has spiraled out of control, owed partly to the poor economic decisions made by the nation’s central bank. In fact, the housing crisis became so ridiculous that land just in Tokyo was worth more than land in the United States in its entirety!
Before the economic downturn came to fruition, in 1989 the Nikkei peaked at 38,916 points. The scary thing is that almost 30 years later, the Nikkei 225 has still not got anywhere close to the all-time highs it experienced in 1989.
In fact, at the time of writing in March 2019, the Nikkei 225 index is positioned at just over 21,500 points. Moreover, the highest record the Nikkei 225 index has been able to set since its 1989 heights was the 24,270 points it hit in December 2018.
However, this doesn’t necessarily make the Nikkei 225 index an unworthy investment. While the above figures do make nervous reading, it is important to remember that investing is all about timing.
In other words, those involved in the Nikkei 225 investment space back in the mid-to-late 1980s would have no doubt been hit hard by the crash. On the other hand, the index has been performing reasonably well since late 2012, where it was priced in the region of 8,00 points.
So now that you know how the Nikkei 225 has performed over the past 30 years, in the next section of our guide we are going to show you how you can make an investment.
How do you Invest in the Nikkei 225?
Firstly, it is important to remember that if you are looking to invest in the performance of the Nikkei 225, it would not make financial sense to do it by backing the individual companies that make the index yourself.
You would essentially need to purchase 225 individual stocks, which would not only be expensive, but highly complicated. As such, you would instead by best utilizing either an index fund or exchange traded fund (ETF).
You should also recognize that the official Nikkei 225 tracking index cannot be invested into per-say. This is because the index itself is there for tracking purposes only, rather than acting as a direct financial instrument.
As such, you will need to use a third party institution that tracks the Nikkei 225 index themselves. Each institution will have their own underlying mechanisms in their attempt to track the official index. Furthermore, some index funds or ETFs will even attempt to beat the official index, by making some weighting adjustments.
Let’s explore how a Nikkei 225 investment would work.
Investing in the Nikkei 225 via an Index Fund
One of the most popular ways to invest in the performance of the Nikkei 225 is to utilize the services of an index fund. Index funds are offered by major institutions, meaning that you are investing your funds with the institution themselves, rather than the actual Nikkei 225.
The index fund will most commonly replicate the performance of the Nikkei 225 by actually purchasing the underlying shares of the companies that make the index. As noted above, this would be a complex task for an individual investor to perform independently, however institutions have the required framework to do this.
One of the leading index funds in this respect is the Daiwa Japan Nikkei 225 Index Fund. With an expense ratio of just 0.16%, this particular fund is one of the most competitively priced in the space. The fund aims to replicate the performance of the Nikkei 225 by purchasing the shares that constitute the index.
Read: What is an Index Fund?
Now let’s take a look at Nikkei 225 ETFs.
Investing in the Nikkei 225 via an Exchange Traded Fund (ETF)
An alternative avenue that you can take to invest in the performance of the Nikkei 225 is to purchase an ETF. ETFs are financial instruments that have the capacity to track virtually any asset class. Whether its oil, interest rates, Gold or foreign currency, you’ll find ETFs on the vast majority of major exchanges.
Read: What is an ETF?
When you purchase an ETF, the process works in a very similar way to that of a conventional equity. The reason for this is that the market value of the Nikkei 225 ETF will rise and fall throughout the day. Moreover, you can then sell your ETF on the open marketplace, just like you would with a company stock.
One of the most prominent Nikkei ETFs is that of the Nikkei 225 Exchange Traded Fund offered by Nomura Asset Management. Although the expense ratio is slightly higher at 0.22%, this still provides good value if you prefer the ETF route. The ETF itself operates on the Tokyo Stock Exchange, meaning that you have the option of trading it on the open marketplace at your will.
We have reviewed a number of investing platforms and robo-advisors which are able to give you access to the Nikkei 225 via funds and ETFs. Take a look at our reviews: