The Nikkei 225 index is a bit bunk

[mighty58]

(most of you might know this already, but as I only recently discovered this, I thought it might be useful to share)

The Nikkei 225 is the best-known of Japanese indexes, but due to the way it's structured, it turns out it's not the best way to get exposure to the entire Japanese market. The Nikkei 225 is, for some reason, weighted by STOCK PRICE, not market capitalization. As such, this creates some strange distortions:

Couple examples, using the S&P 500 (which is market-cap weighted) as a comparison:

Top 10 stocks on the SP500:

1. Apple
2. Microsoft
3. Amazon
4. Facebook
5. Alphabet
6. Tesla
7. Alphabet
8. Berkshire Hathaway
9. Johnson & Johnson
10. JPMorgan Chase

All solid names that you’d expect to see at the top of a list like this, representing the biggest US companies. Right?

Top 10 stocks on the Nikkei 225:

1. Fast Retailing (aka Uniqlo)
2. Softbank Group
3. Tokyo Electron
4. Fanuc
5. Daikin Industries
6. M3, Inc.
7. KDDI
8. Shin-Etsu Chemicals
9. TDK
10. Advantest

WTF?! Except for no. 1 and 2, and maybe no.7, none of those names seems to belong. Where’s Toyota? Honda? Sony? NTT? MUFG?
Another quirk: Nintendo, one of the top companies by market cap, is not even included in the Nikkei 225! If it was, it would be #2.

The Top 10 & Top 20 stocks also get disproportionate weight within the index:
Weight of Top 10:

• S&P500: 28%
• Nikkei225: 42%

Weight of Top 20:

• S&P500: 37%
• Nikkei225: 57%

So if you buy the Nikkei 225, instead of diversifying, you've actually just concentrated 42% of your money into those 10 companies listed above.
BTW, except for Sony, none of the big-name stocks I mentioned above are even in the Top 20. Toyota comprises just 0.95% of this index.

[TL/DR] All this to say, buying the Nikkei 225 index does NOT give you diversification across the Japanese market. If you want to “buy Japan”, and have your index weighted for the real blue-chips, buy the TOPIX index, which comprises all stocks on the First Section of the TSE, weighted by market cap.

[adamu]

Yeah, going with TOPIX is good advice...
...in fact I should write that down somewhere

Comparing it to the S&P500 isn't very fair though. The more accurate equivalent is the dow jones, which is also a stock price average.

I wonder why Nikkei funds are more prevalent than dow jones funds (or maybe they're not, but that's my perspective).

[fools_gold]

So if you buy the Nikkei 225, instead of diversifying, you've actually just concentrated 42% of your money into those 10 companies listed above.
BTW, except for Sony, none of the big-name stocks I mentioned above are even in the Top 20. Toyota comprises just 0.95% of this index.

It's even worse that that. I recently read that just two companies, Fast Retailing and Softbank, now account for 19% of the Nikkei 225!

The Japan Exchange Group tried to create their equivalent of the S&P500 called the JPX400. The companies are screened for entry and it is market-cap weighted. It looks good, but unfortunately it hasn't really caught on. https://www.jpx.co.jp/english/markets/i ... nikkei400/

[mighty58]

Comparing it to the S&P500 isn't very fair though. The more accurate equivalent is the dow jones, which is also a stock price average.

I wonder why Nikkei funds are more prevalent than dow jones funds (or maybe they're not, but that's my perspective).

Fair enough, but I compared the Nikkei with the SP500 because, whether intentionally or not, the Nikkei purports to be representative of "the market" as a whole, and unless you look into it, it's not obvious that it is stock-price weighted. I'm not a complete beginner to investing, but it never even occurred to me that it wouldn't be market-cap weighted. The Dow, on the other hand, is just 30 companies, all blue-chips, and most people who invest (?) I believe are aware it's limited in that way... hence the lack of Dow funds.

[mighty58]

The Japan Exchange Group tried to create their equivalent of the S&P500 called the JPX400. The companies are screened for entry and it is market-cap weighted. It looks good, but unfortunately it hasn't really caught on. https://www.jpx.co.jp/english/markets/i ... nikkei400/

I didn't even know the JPX400 existed, thanks! I like that it includes issues from the Mothers and JASDAQ as well, so this look like it might be better than TOPIX (which is limited to the First Section of the TSE) for a broader coverage of Japanese companies. I did a quick search and did find a few funds tracking this index... never noticed them because I sort by expense ratio and they are down the list with expenses at least 25% higher (0.15% vs. 0.21%) than those tracking the Nikkei or TOPIX.

[TokyoWart]

(most of you might know this already, but as I only recently discovered this, I thought it might be useful to share)

The Nikkei 225 is the best-known of Japanese indexes, but due to the way it's structured, it turns out it's not the best way to get exposure to the entire Japanese market. The Nikkei 225 is, for some reason, weighted by STOCK PRICE, not market capitalization. As such, this creates some strange distortions:

Couple examples, using the S&P 500 (which is market-cap weighted) as a comparison:

Top 10 stocks on the SP500:

1. Apple
2. Microsoft
3. Amazon
4. Facebook
5. Alphabet
6. Tesla
7. Alphabet
8. Berkshire Hathaway
9. Johnson & Johnson
10. JPMorgan Chase

All solid names that you’d expect to see at the top of a list like this, representing the biggest US companies. Right?

Top 10 stocks on the Nikkei 225:

1. Fast Retailing (aka Uniqlo)
2. Softbank Group
3. Tokyo Electron
4. Fanuc
5. Daikin Industries
6. M3, Inc.
7. KDDI
8. Shin-Etsu Chemicals
9. TDK
10. Advantest

WTF?! Except for no. 1 and 2, and maybe no.7, none of those names seems to belong. Where’s Toyota? Honda? Sony? NTT? MUFG?
Another quirk: Nintendo, one of the top companies by market cap, is not even included in the Nikkei 225! If it was, it would be #2.

The Top 10 & Top 20 stocks also get disproportionate weight within the index:
Weight of Top 10:

• S&P500: 28%
• Nikkei225: 42%

Weight of Top 20:

• S&P500: 37%
• Nikkei225: 57%

So if you buy the Nikkei 225, instead of diversifying, you've actually just concentrated 42% of your money into those 10 companies listed above.
BTW, except for Sony, none of the big-name stocks I mentioned above are even in the Top 20. Toyota comprises just 0.95% of this index.

[TL/DR] All this to say, buying the Nikkei 225 index does NOT give you diversification across the Japanese market. If you want to “buy Japan”, and have your index weighted for the real blue-chips, buy the TOPIX index, which comprises all stocks on the First Section of the TSE, weighted by market cap.

While the Nikkei 225 as a price-weighted index seems archaic and it's reasonable to say that TOPIX better represents the Japanese stock market as a whole, in fact the Nikkei has outperformed TOPIX over long periods of time. I think the most recent reason is that the companies in the N225 are more likely to be benefiting from moves by the Bank of Japan but the outperformance has been going on for over a decade (i.e. before the largest Bank of Japan moves). Look at this graph on the Nikkei-to-TOPIX index:

https://www.ft.com/content/95cbd726-5ef ... 9c2307bcd4

[captainspoke]

The Dow: https://www.investopedia.com/ask/answer ... ighted.asp

(not going to try googling the history, but the Dow could have been the model for the Nikkei)

[fools_gold]

Funnily enough there was an article on Bloomberg today about the problems of the Nikkei's price weighting: https://www.bloomberg.com/news/articles ... -dominance

[mighty58]

And if Uniqlo''s dominance isn't bad enough, imagine the situation if Son hadn't decided to do a 1:2 stock split for SoftBank last year! Weighting based on stock price really makes zero sense...