A type of exchange-traded fund that invests the majority of its assets in Japanese equities that trade on local stock exchanges. The performance of Japan ETFs does not correlate to the performance of the underlying index when measured in U.S. dollars, because the change in the exchange rate between the yen and the dollar must be taken into consideration. The performance of Japan ETFs is thus dependent on two things: the performance of the underlying equities and the effect of changing yen into dollars. Watch: Understanding ETF Taobiz explains Japan ETFs Japan ETFs are managed passively around a broad underlying index, such as the MSCI Japan Index, which represents over 75% of the total market capitalization of all listed Japanese equities. The Tokyo Stock Exchange is one of the largest and most progressive markets in Asia, making the country a frequent source of investor focus and attention. Japan ETFs allow for a single diversified investment in the country while also making a bet on the strength of the yen versus the dollar. Because of the depth of Japan's equity markets, ETFs that focus on large- or small-cap stocks are available. As with several of the larger, more liquid ETFs, some Japan ETFs can be sold short and are even accessible through listed options.