Foreign investors are dumping derivatives contracts on Japan's TOPIX equity index but buying up individual, select company shares in a trade investors and analysts say is a vote of confidence in the earnings potential of companies.

Investors outside Japan net sold TOPIX futures last week at the fastest pace in almost four months and turned net buyers of cash equities for the first time in three weeks.

Active investment managers are likely paring bets on gains in the broader TOPIX index, which includes many small illiquid companies, and instead investing in companies in the Nikkei 225 with better liquidity that will benefit from a pickup in global semiconductor demand, investors and analysts said.

"This looks like an active strategy where investors get out of the TOPIX because it is not rising so much," said Kiyoshi Ishigane, chief fund manager at Mitsubishi UFJ Kokusai Asset Management Co in Tokyo.

"However, these investors are still positive on Japanese equities, so they're buying individual shares that they expect to rise faster than the TOPIX. In this case, technology shares are an easy buy."

Foreign investors net sold 292.5 billion yen ($2.67 billion) in TOPIX futures in the week ended Jan. 17, data from the Japan Exchange Group showed. That was the biggest net selling since the week ended Oct. 4. 2019.

Last week, foreign investors bought 75.1 billion yen of Japanese equities on a cash basis, the first net purchase since the week ended Dec. 27 last year, according to the data. So far this year, IT systems provider NEC Corp and electronics maker Panasonic Corp are among the top gainers on the Nikkei 225.