The WisdomTree International Hedged Equity Fund (HEDJ), now called the WisdomTree Europe Hedged Equity Fund, switched its underlying index last week as the issuer looks to breathe life back into the three-year-old ETF.
By narrowing its focus to Europe, perhaps HEDJ can replicate the success of WisdomTree’s Japan Hedged Equity Fund (DXJ), which enjoys a robust $578 million in assets, whereas other currency-hedged ETFs struggle with meager assets below $15 million.
Before switching indexes, the fund’s exposure was too broad. Previously, HEDJ offered a currency hedge on non-U.S. currencies relative to the dollar. In this case, it provided higher returns than an equivalent noncurrency-hedged fund when the value of the U.S. dollar was going up relative to other currencies, but lower returns when the dollar was falling.
Arguably, this index would suit those who were bullish on the dollar and bearish on all other foreign currencies. This is a shame, as there are some currencies investors would want to have exposure to, and not want to hedge against.
HEDJ’s new index is bearish just on the euro, which I think most reasonable people at this time would be.
The mismanagement of the euro aside, Europe has many companies that are worth investing in:Nestle, Adidas and Siemens, to name a few. HEDJ makes it possible to invest in such companies while mitigating the effects of a falling euro.
The key to HEDJ’s exposure, as with most index-tracking investment vehicles, lies in its benchmark.
According to WisdomTree, companies included in the fund’s underlying index must pay dividends, be domiciled in Europe, trade in euros and derive at least half their revenue from countries outside Europe.
The index’s currency hedge is the outcome of this last selection screen, in addition to the use of forward contracts.
European companies that make money through exporting would be more hospitable to a weakness in the euro, as this would translate to a decrease in the relative cost of the goods and services they provide, and consequently an increase in demand from foreign countries of those goods and services.
However, investors should also be aware of the fact that HEDJ’s dividend-weighting scheme and preference to exporting industries are likely to create some heavy tilts in the portfolio. This would be facilitated by the fact that the maximum sector and country weights are both capped at 25 percent, making large overweights in certain industries and countries more likely.
This is an advantage for investors when the market is down.
But if the euro picks up, HEDJ wouldn’t benefit from the rise as much as its noncurrency-hedged competitors, such as the iShares MSCI EMU Index Fund (EZU) and the Vanguard MSCI Europe ETF (VGK). Admittedly, the fate of the euro is still largely uncertain, though it’s been looking grim lately; meaning that for now, HEDJ is just what the doctor ordered.
But will investors pay attention? Well, they might miss out if they don’t.
Data since the inception of the WisdomTree Europe Hedged Equity Index dating back to July looks promising. HEDJ’s underlying index outperformed those of EZU and VGK.
This mirrors the performance of WisdomTree’s DXJ over the past year. It outperformed both the SPDR Russell/Nomura PRIME Japan ETF (JPP) and the iShares MSCI Japan Index Fund (EWJ) by about 2 percentage points.
Investors need to take heed.
Until recently, the only options ETF investors had in the developed Europe equity space were market-cap-weighted and selected plain-vanilla funds. Now, HEDJ offers flavor as well as security in a segment of the market that severely lacks it.
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