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WisdomTree Plans Small-Cap Version Of DXJ

Cinthia Murphy


WisdomTree, the publicly traded New York-based ETF firm, is looking to expand on the blockbuster success it’s had with the WisdomTree Japan Hedged Equity Fund (DXJ) by putting into the regulatory pipeline a small-cap version of DXJ.

The firm is also looking to add other country-focused currency hedged strategies to its roster, including a fund focused on Korea and one on the U.K., according to two separate filings it put into registration this week.

The WisdomTree Japan Hedged SmallCap Equity Fund will track a proprietary dividend-weighted index that measures the performance of Japanese companies of small capitalization—at least $100 million in market cap—that are listed in Tokyo.

These companies must derive less than 80 percent of their revenue domestically in order to be included in the mix, the filing said. It’s that type of focus on exporters and companies with a global footprint that has helped its broader counterpart, DXJ, do so well.

Last November, WisdomTree tinkered with DXJ’s benchmark to tilt it toward exporters—companies that have done well as the yen has weakened due to stimulus measures that have sought to bring Japan out of its deflationary doldrums. Since then, the now-$6 billion fund—which serves up currency-hedged exposure to Japanese equities—has rallied some 50 percent in the past six months while seeing net inflows of $4.72 billion.

Small-cap companies are often thought to be more sensitive to domestic growth stories, which could put WisdomTree’s new ETF in a rather sweet spot at a time when all eyes are on Japan’s aggressive quantitative easing measures that are designed to spur growth in a country that has been plagued by slow growth and deflationary pressures for almost 25 years.

The new ETF will also screen for companies that have paid at least $5 million in cash dividends on common shares in the annual cycle, and that have seen consistent trading volume to the tune of $100,000 average daily dollar volume for three months preceding rebalance, and at least 250,000 shares a month for six months.

Securities are weighted based on annual cash dividends paid, the filing said, with individual stocks capped at 2 percent, and sectors capped at 25 percent.


Adding Korea, U.K. To Hedged Equities Lineup

WisdomTree's plans also include a Korea and a U.K. hedged equity funds. These funds are designed to outperform similar strategies that don’t neutralize the impact of currency movement, the company said in both filings.

The WisdomTree Korea Hedged Equity Fund , linked to an in-house index, will serve up exposure to Korean equities while hedging out exposure to the fluctuation of the Korean won relative to the U.S. dollar.

The portfolio will comprise only securities from companies that derive less than 80 percent of their revenues domestically—again, a tilt toward companies with a more global revenue base in place. The stocks must trade on the Korea Stock Exchange.

Aside from having to be incorporated in Korea, these companies also need to show net income of at least $5 million in the fiscal year prior to rebalance, and a market capitalization of at least $1 billion. Trading volume and price-to-earnings ratio requirements also apply, the filing said.

The securities are weighted based on reported net income, and the largest stock is capped at 10 percent of the portfolio, with the second largest capped at 4.5 percent. Any individual sector may not represent more than 25 percent of the total mix.

Similarly, the WisdomTree United Kingdom Hedged Equity Fund will consist of a portfolio of U.K. equities that neutralizes the impact of fluctuations of the British pound against the U.S. dollar.

The fund will comprise securities of dividend-paying companies incorporated in the U.K. that derive less than 80 percent of their revenues from the United Kingdom.

These companies must have paid at least $5 million in cash dividends in the annual cycle prior to index rebalance, have a market capitalization of at least $1 billion and meet trading volume requirements, the filing said. Individual securities are capped at 5 percent of the overall mix, with sector allocation capped at 25 percent.


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