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WisdomTree Plans Europe and Japan Dividend ETFs

Zacks Equity Research

Designing dividend ETFs has become a forte of WisdomTree. The issuer has a nice line-up of dividend weighted ETFs in which securities tend to focus on cash dividends. 

Most recently, WisdomTree filed for two passively managed ETFs, one in the European equities space and the other in Japan. The duo also treats dividend growth as a prime condition for stock selection.

Proposed Dividend Funds in Focus

WisdomTree Europe Dividend Growth Fund and WisdomTree Japan Hedged Dividend Growth Fund look to rest on their respective geographies with the same dividend investing proposition.
The proposed Europe ETF will be tracking the WisdomTree Europe Dividend Growth Index holding 300 stocks that have the best fundamental factors like long-term earnings growth expectations, ROE, and ROA and high chances of dividend increases. In fact, the companies paying higher dollar amounts of dividends are weighted more heavily.

Geographically, the index is exposed to 15 countries namely, Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland or the United Kingdom
It should also be noted that the maximum weight of any stock is limited to 5% and maximum exposure of any sector or country is restricted at 20%, so there looks to be a solid level of diversification and a broader play in the Europe equities’ space.

The Japan ETF will be seeking to match the WisdomTree Japan Hedged Dividend Growth Index. At the same time, the planned Japan ETF intends to provide a hedge against currency fluctuations.

The index will give exposure to 300 stocks domiciled in Japan or listed on the Tokyo or Jasdaq stock exchanges.  This index also follows the rule of maximum weight restriction as does the Europe index (read: Is Another Great Year Ahead for Japan ETFs?).

In terms of the currency hedge, the fund looks to enter into forward currency contracts or futures designed to partially make up for exposure to the Japanese yen. With this strategy, the fund looks to outperform when the yen is sliding, and underperform unhedged benchmarks when the situation reverses (read: Japanese Yen ETF Investing 101).

How Does it Fit in the Portfolio?

These proposed products could be interesting picks for yield-starved investors. High quality dividend stocks and ETFs are better options for investors seeking yields in the current environment of rock-bottom interest rates prevailing in Japan and Europe.

Normally, most dividend paying companies are stable, mature companies making these investments good vehicles for greater stability and safety in a volatile environment. Also, the extra fundamental factors like better long-term growth rates, ROE and ROA will help investors get a better selection of stocks in these ETFs.

Also, currency hedging, especially for the Japan fund, appears to be a good strategy when the Fed has started tapering its bond repurchases and Japan has kept its stimulus intact. This will likely make the yen weaker than the greenback, spurring the need for yen hedging (read: Inside the New Currency Hedged ETFs from iShares).

ETF Competition

The proposed ETFs do not have any direct competitor due to their unique strategy. However, two dividend products – WisdomTree Europe SmallCap Dividend Fund (DFE) and STOXX European Select Dividend Index Fund (FDD) – could provide some competition to the proposed ETF in the Europe space. FDD and DFE yield 3.51% and 2.25% respectively (as of February 25, 2014).

WisdomTree’s own fund DFE consists of the companies that make up the bottom 25% of the market capitalization of the WisdomTree Europe Dividend Index after the 300 largest companies have been taken away (read: Is This a Better Europe ETF?).

On the other hand, the First Trust fund FDD tracks an index that consists of 30 highest dividend-yielding securities across 18 European countries selected from the Dow Jones STOXX 600 Index. DFE and FDD charge 58 and 60 bps in fees, respectively.

Coming to Japan ETFs, the proposed fund will likely vie with its other WisdomTree cousins like Japan Hedged Equity Fund (DXJ) and Japan Small-Cap Fund (DFJ). The dividend yield of DXJ and DFJ presently stand at 2.59% and 2.24% (as of February 25, 2014). The ultra-popular DFJ charges 48 bps in fees while DFJ charges a slightly higher expense ratio of 58 bps.  

Given this, the planned funds could be competitive, and especially so for investors seeking a dividend tilt in Japan. The European market appears to be dicey, but with some solid levels of outperformance, the proposed WisdomTree fund in this market could compete too, should it pass regulatory hurdles.

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