Currency fluctuations impact returns for investors in Japan ETFs

HEWJ’s holdings, as reported on August 31, 2026, primarily consist of EWJ shares, along with yen and U.S. dollar currency contracts designed to offset currency fluctuations. This structure isolates the impact of currency movements, revealing a significant factor in the performance difference.

While EWJ’s expense ratio is relatively low at 0.49%, or $1,470 annually on a $300,000 investment, the currency effect far outweighed this cost.

The difference stems from the fact that EWJ tracks the MSCI Japan Index, which is priced in yen. As the yen weakened against the dollar during the period, converting yen-denominated returns back into dollars reduced the overall value for EWJ holders. On November 3, 2025, a dollar bought 154.21 yen, compared to 158.66 yen on November 3, 2026. The yen’s value fluctuated significantly during this time, ranging from a low of 152.08 to a high of 163.94.

Currency hedging, as employed by HEWJ, provides a benefit when the local currency weakens, as it did with the yen. Conversely, if the yen had strengthened, EWJ holders would have benefited while HEWJ holders would have lost out. Hedging also incurs costs, including the expense of rolling currency contracts.

For comparison, the WisdomTree Japan Hedged Equity Fund (DXJ) achieved a 31.72% return over the same period, leaving EWJ holders trailing by $48,660 with the same hypothetical investment. DXJ’s superior performance is partly attributable to its different index and stock selection, in addition to the currency hedge. Its expense ratio, as of July 31, 2026, is also 0.48%.

Investors considering international funds should be aware of the impact of currency exposure. The decision to hedge currency risk should be a deliberate one, aligning with an investor’s overall strategy and comfort level with currency fluctuations. Understanding this dynamic can help investors make informed choices about their international investments.