This ASX ETF has soared almost 40% in a year! Should you buy?

This Japanese ETF has performed exceptionally well.

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The Japanese share market has generated significant returns over the past year. The Betashares Japan-Currency Hedged ETF (ASX: HJPN) is an exciting investment to consider.

On the Tokyo Stock Exchange, we can find some of the leading Asian companies, including Toyota, Sony, Mitsubishi, Hitachi, Nintendo, Honda, Daikin Industries, Canon and Bridgestone.

I think there are a few good reasons to consider the HJPN ETF beyond just its past performance.

Diversification

The Japanese share market can provide exposure to under-represented sectors in the ASX share market.

Looking at the sector allocation, five industries have a weighting of more than 10% in the HJPN ETF: consumer discretionary (24.3%), industrials (23.4%), IT (17.9%), financials (10.4%), and healthcare (10.1%). Meanwhile, around half of the S&P/ASX 200 Index (ASX: XJO) is weighted to just two sectors, ASX bank shares and ASX mining shares.

Plenty of the leading Japanese businesses generate a "substantial portion" of their revenue outside of Japan, according to BetaShares, which is good underlying diversification of their earnings. A lot of the profit generated by large ASX blue-chip shares is generated within Australia (and New Zealand).

It's currently invested in around 150 businesses, which is ample diversification in terms of holdings, in my opinion.

Improving situation for Japanese stocks

In the 12 months to 31 May 2024, the HJPN ETF delivered a net return of 37.47% and I think it could keep performing solidly. Remember, past performance is not a reliable indicator of future performance with this ASX ETF.

New rules and disclosures by the Tokyo Stock Exchange are targeting companies with "poor capital efficiency, asking them to disclose plans for how they will realise corporate value for shareholders", according to investment outfit Alliance Trust.

Japan may be breaking from the shackles of its deflationary situation, which has affected its economy for decades. 'Real' wage growth – where wages rise faster than inflation – could keep deflation at bay.

Japan's biggest union recently agreed to its first "significant" pay rise for its workers in 33 years.

Alliance noted that WTW economists believe wage growth and easing inflation could increase domestic consumption, benefiting Japanese shares, particularly domestic-focused Japanese stocks.

Reasonable fee

It's not the cheapest ASX ETF, with an annual management fee of 0.56%. There are plenty of cheaper ASX ETFs out there, but I think it's a fair cost for the specific Japanese allocation it can give to an Aussie's portfolio. Active managers would typically charge at least 1% to invest in Japanese shares.

This fund also has currency hedging for the Japanese yen exposure, reducing the effect of currency fluctuations on portfolio performance.

Foolish takeaway

I think it's a compelling ASX ETF to consider with actions that are supporting the Japanese economy and stock market. I don't know what the short-term returns will be, but I'm optimistic about the longer term as companies better utilise their capital for growth and/or improve shareholder returns.

Motley Fool contributor Tristan Harrison has positions in Alliance Trust Plc. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended Nintendo. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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