Japanese stocks are rallying, and some small- and mid-cap names could start participating in those gains, some investors say. Corporate governance reforms and a weaker yen initially helped the sector surge and started investors buzzing about the market’s prospects. This week, the Nikkei 225 topped the key 33,000 level — a figure investors haven’t seen since July 1990. Separately, the Topix also reached new 2023 highs. .N225 YTD mountain Nikkei 225 this year While the rally has mostly swept up large-cap names, some small- and mid-cap stocks could start to catch up — and even outperform — larger-cap stocks should enthusiasm continue. The iShares MSCI Japan ETF , which focuses on larger cap stocks in the market, is higher by 16% in 2023. Meanwhile, the iShares MSCI Japan Small-Cap ETF is up more than 7% over the same time period. “I believe that should the path of corporate governance strengthening sustains itself and extends to the mid- and small-cap space, those groups are likely to put on stronger outperformance versus their larger cap peers,” wrote Carlos Asilis, investment chief at Glovista Investments. SCJ YTD mountain iShares MSCI Japan Small-Cap ETF this year What’s more, cyclical stocks are more heavily represented in small- and mid-cap Japanese equities than among large-caps. That’s a group that’s set to outperform should global recession concerns ease. To be sure, the investor clarified small- and mid-caps are a near-term opportunity for traders. Over the long term, large-cap Japanese stocks such as industrials will continue to outperform given the weakening demographics story in the country, he said. Ways to play One passive investment for investors is the iShares MSCI Japan Small-Cap ETF (SCJ) , which tracks a market-cap weighted benchmark for small-cap equities in the country. With just $98 million in assets, it’s a small index that has seen just $27.31 million in fund flows year to date, according to FactSet data. However, it’s relatively cheap with a 0.5% expense ratio. And, it’s higher this year by more than 7%. However, Glovista’s Asilis said investors might instead prefer to gain exposure to the market by searching for some highly rated mutual funds. One example is Fidelity Japan Smaller Companies (FJSCX) . The fund has a total of $379.3 million in assets under management, and has a four-star rating from Morningstar. As of March, the fund’s top holding, with a 3% allocation, was Renesas Electronics, a chipmaker for cars and other industries. However, the FJSCX, which has an expense ratio of 0.910%, is underperforming this year. It’s up by roughly 13%, while its category is up by 16%. Another actively managed fund is the Hennessy Japan Small Cap Investor (HJPSX) . It has $111.2 million in assets under management, and it’s up by 9.5% this year. In March, its top holding was transportation equipment maker Musashi Seimitsu Industry, with a 2% stake. HJPSX has just three stars from Morningstar, as well as a 1.580% expense ratio.
