WisdomTree, the publicly traded New York-based ETF firm, continues to expand on the blockbuster success it’s had with the WisdomTree Japan Hedged Equity Fund (DXJ) by pushing forward plans for yet another currency-hedged ETF, this time focused on Germany.
The WisdomTree Germany Hedged Equity Fund will track a proprietary WisdomTree dividend-weighted index that taps into German equities while neutralizing exposure to currency fluctuations between the euro and the U.S. dollar, according to a filing submitted to regulators this week.
WisdomTree first put this fund in registration in July 2011 , and it seems this time the firm is refocusing the portfolio to include only Germany-incorporated companies that derive less than 80 percent of their revenues domestically. That screen is designed to capture companies that have a more global revenue base, meaning those that should benefit most from a strong U.S. dollar.
The currency hedge mechanism is, indeed, designed to protect investors from changes in the euro-dollar exchange rates, and should deliver higher returns than a similar un-hedged portfolio when the euro is weakening against the dollar. The reverse, however, is true—the hedged ETF will underperform an un-hedged counterpart when the dollar is the one losing ground to the euro.
The recipe is the same one WisdomTree has applied to Japan equities, and one that has turned DXJ into a $6.8 billion fund amid net inflows of more than $4.77 billion, and gains exceeding 25 percent in just over three months, as the yen continues its downward slide against the U.S. dollar.
By comparison, the $7.3 billion iShares MSCI Japan Index Fund (EWJ)—for all purposes DXJ’s un-hedged competitor—has attracted $3.50 billion year-to-date and tagged on gains of 15 percent in the period; a 10 percentage-point difference that’s mostly tied to the currency impact on the overall returns.
When it comes to Germany, Germany-listed securities have recently struggled to shake off the eurozone debt malaise centered on countries like Greece, Spain and Italy, but it remains one of the leading economies in the region.
The $2.68 billion iShares MSCI Germany Index Fund (EWG), for instance, has bled 4 percent of its value year-to-date—although the fund remains up nearly 8 percent year-on-year—amid net outflows of $1.27 billion.
To be eligible for inclusion in the WisdomTree planned ETF, a company needs to be primarily listed on German exchanges, have paid at least $5 million in cash dividends in the prior year, have a market capitalization of at least $1 billion and meet trading liquidity requirements.
Securities are weighted based on their annual cash dividends, with those paying the most snagging a bigger piece of the pie. Individual sector allocations are capped at 25 percent of the overall portfolio, the filing said.
Ticker and fees were not disclosed.
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