Vanguard FTSE Japan ETF: July 2025 update

• Vanguard is a pioneer in index investing and launched its first ETF in 2001

• This ETF offers exposure to a broad range of companies in Japan

• It’s closely tracked the FTSE Japan Index since launch

How it fits in a portfolio

An ETF is a basket of investments that often includes company shares or bonds. They tend to track the performance of an index such as the FTSE Japan Index and trade on stock exchanges, like shares. This means their price fluctuates throughout the day.

The Vanguard FTSE Japan ETF invests in a range of large and medium-sized Japanese companies across a variety of sectors.

An ETF is one of the simplest ways to invest and can be a low-cost starting point for an investment portfolio aiming to deliver long-term growth. ETFs that track the Japanese market could be used to diversify a portfolio that’s focused on other areas like the US and Europe.

Manager

Vanguard is a pioneer when it comes to passive investing, having created the first retail index fund over 45 years ago. It now runs some of the largest index funds and ETFs in the world. Given its size, it has a big investment team with the expertise and resources to help its ETFs track indices and markets as closely as possible, while having scale to keep costs down.

Vanguard ETFs are run by a large, global team. They’re spread across three investment hubs around the world – the US, UK and Australia. This team-based approach means there’s no named manager on the ETF. As a collective team, Vanguard has run this ETF for 12 years.

Vanguard also has a trading analytics team, which is responsible for ensuring the ETFs buy and sell investments efficiently and at a competitive cost. This involves analysing data from different brokers and banks. Lower costs should help the ETFs track their benchmarks as tightly as possible.

Process

This ETF aims to track the performance of the FTSE Japan Index. It does this by investing in all the companies in the index, currently 486, and in line with each company’s index weight. This is known as full replication and can help the ETF track the index closely.

The ETF has a large amount invested in the industrials and consumer discretionary sectors which made up 26.2% and 22.2% of the ETF respectively at the end of June. Other key sectors include financials and technology.

Reducing costs is a key part of keeping the tracking difference between the ETF and the benchmark to a minimum. In any ETF, factors like taxes, dealing commissions and spreads, and the cost of running the ETF all drag on performance. To help keep these costs down, the team aims to make large investments in companies instead of lots of small transactions.

Vanguard will also lend some of the investments in the ETF to other providers in exchange for a fee, which can be used to offset some of the costs. It will only lend securities to a limited number of high-quality approved dealers. Vanguard indemnifies the fund against any loss from this process, meaning there should be no negative impact on investors. However, stock lending adds risk.

As this ETF is listed offshore investors are not usually entitled to compensation from the UK Financial Services Compensation Scheme.

Culture

Vanguard is currently the second largest asset manager in the world and runs around $10trn of assets globally as of March 2025. The group aims to put the client at the forefront of everything it does, which drives its focus on quality, low-cost index products.

John Bogle founded Vanguard in 1975, and it’s owned by investors. This allows Vanguard to redirect its profits back to investors in the form of lower fees, instead of paying dividends to external shareholders. Bogle believed in creating products that simply track the performance of a market rather than taking a shot at picking individual companies which may beat them.

The team running this ETF works closely with other equity research and risk departments across the business. They have daily and weekly meetings to discuss ongoing strategy which could add good support and challenge on how to run the ETF effectively.

ESG Integration

Vanguard is predominantly a passive fund house. While it’s offered exclusions-based passive funds for many years, it’s lagged peers in offering passive funds that explicitly integrate Environmental, Social and Governance (ESG) criteria by tracking indices that tilt towards companies with positive ESG characteristics, and away from those that don’t.

Vanguard’s Investment Stewardship team carries out most of the firm’s voting and engagement activity. Its stewardship activity is grounded in the firm’s four principles of good governance: board composition and effectiveness, board oversight of strategy and risk, executive pay and shareholder rights.

The Investment Stewardship team produces frequent insights on their engagement activity at both a corporate and governmental level. Investors can also access fund-by-fund proxy voting records, although voting rationales are not provided. That said, voting and engagement case studies can be found in the firm’s annual Investment Stewardship report and quarterly Engagement and Voting reports.

Vanguard courted controversy in 2022 when it left the Net Zero Asset Managers’ Initiative, a group of asset managers that have committed to achieving net zero carbon emissions by 2050. It claimed its decision would improve clarity for investors and allow it to speak independently. We view this as a disappointing backward step. Furthermore, in 2024 it was reported that Vanguard failed to support a single shareholder proposal requiring more action from investee companies on environmental and social matters.

The Vanguard FTSE Japan ETF tracks an index that doesn’t specifically integrate ESG considerations into its process. The ETF can therefore invest in shares issued by companies in any sector in line with the benchmark.

Cost

The ETF currently has an ongoing annual fund charge of 0.15%. The annual charge to hold ETFs in the HL ISA or SIPP is 0.45% and in the HL LISA is 0.25% (capped at £45 in the ISAs and £200 in the SIPP). There are no charges from HL to hold ETFs within the HL Fund and Share Account or HL Junior ISA.

As ETFs trade like shares, both a buy and sell instruction will be subject to the HL share dealing charges.

Performance

Since launch in May 2013, the ETF has done a good job of tracking the FTSE Japan Index, returning 117.26%* versus 121.34% for the index. As expected from an ETF, it’s lagged the benchmark over the long term because of the costs involved in managing it. However, the tools used by the managers have helped to keep performance tight to the index. Remember, past performance isn’t a guide to the future.

Over the past 12 months, the ETF has gained 5.82% compared to 5.93% for the index. The consumer discretionary sector contributed the most to the ETF’s performance, followed by financials. Whereas healthcare and basic materials were the main detractors from performance.

While many countries have been fighting to keep inflation down, Japan’s been encouraging it after years of deflation, and the Bank of Japan (BoJ) has been raising interest rates. Since raising rates in March 2024 for the first time since 2007, the BoJ has raised rates twice more. This is different to most other major central banks which are lowering interest rates.

Low interest rates in Japan and higher rates overseas have made the Japanese yen less valuable. A weak yen has benefited companies that export more of their goods abroad. This is because a weaker yen makes Japanese goods more attractive to overseas buyers. Continued improvement in corporate governance has also had a positive impact on Japanese companies.

Although there was some volatility throughout the year, like in August 2024 when the main Japanese stock market had its largest daily fall since 1987. Also, like most global stock markets, the Japanese market fell sharply in early April following Trump’s tariff announcements. While both market falls were swift, they later recovered, providing investors with an overall gain for the year.

Given Vanguard’s size, experience and expertise running ETFs, this ETF should continue to track the index well in future, though there are no guarantees.