WisdomTree launches currency-hedged international dividend growth ETF

Nov 3rd, 2016 | By | Category: Equities

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Exchange-traded fund provider WisdomTree has launched the WisdomTree Dynamic Currency Hedged International Quality Dividend Growth Fund (Bats: DHDG), providing exposure to developed international dividend-paying stocks with growth characteristics, while incorporating a dynamic element to mitigate currency exposure.

WisdomTree launches international quality dividend growth ETF with dynamic currency hedging

Jeremy Schwartz, WisdomTree Director of Research.

The ETF seeks to meet a growing demand from investors who are increasingly turning to dividend-paying equities to generate income and pursue higher total return potential, due to a world of persistently low bond yields. In addition, WisdomTree notes that approximately 50% of the world’s investment opportunities are outside the US, highlighting the importance for US investors to diversify their portfolios with international equities.

The fund’s underlying index was created in-house and uses a forward-looking process designed to capitalize on dividend growth trends as they occur. To identify these stocks, growth and quality selection factors are used.

By choosing companies with higher long-term earnings growth forecasts, based on consensus analyst estimates, the index seeks firms which may have greater potential to increase future dividends.

For its value screen, the index evaluates its potential constituents according to three-year average return of equity (ROE) and return on assets (ROA). These metrics highlight the efficiency at which firms generate earnings and thus are indicative of their capacity to increase dividends. Whilst ROE offers a means of gauging profitability, it can be inflated by leverage. ROA on the other hand offers a means of mitigating overleverage, and combined with ROE, offers a way of screening for sustainable earnings.

Securities are weighted in the index to reflect their proportionate annual cash dividends paid.

Turning to currency exposure, WisdomTree notes that developed world currencies have traditionally offered higher expected risk levels with no expected return enhancement. While strategic hedging of currency exposure all the time may be the most natural way to lower long-run volatility of international equity portfolios, WisdomTree is attempting to boost returns by adding hedges only when they are expected to be profitable.

By collaborating with Record Currency Management, WisdomTree has created a rules-based process for determining the timing of currency hedges based on three-factors: interest rate differentials, value and momentum.

  • Interest Rate Differential: If the implied interest rate in the United States is higher than that within the country or region of the targeted currency, it is more attractive to hedge and earn the difference, known as “carry.” Conversely, if the implied interest rate within the country or region of the targeted currency is higher than that of the United States, it is less attractive to hedge as it results in a carry expense. This signal helps manage the cost of hedging as the cost attributable to interest rates becomes greater.
  • Value: If a currency is over-valued relative to the US dollar based on a widely known measure of purchasing power parity, it is more attractive to hedge and when undervalued, it is less attractive to hedge. This is a long run signal and there is a wide band before this signal is applied to the fullest extent.
  • Momentum: A downward trend in the currency relative to the US dollar would signal to put on a hedge, whereas an upward or appreciating trend would signal to take it off.

Jeremy Schwartz, WisdomTree Director of Research, commented: “Investors often take on too much currency risk when they invest overseas. For those who do not want to make the timing decision themselves, DHDG will help dynamically adjust currency-hedge ratios based on a data-driven, transparent process. Adopting a dynamic approach with WisdomTree moves investors away from subjective calls and into a disciplined, factor-based approach to currency hedging. We believe our factors – carry, value and momentum – have potential to outperform both hedged and unhedged strategies over time by rotating currency hedges with their cycles.”

WisdomTree now offers three different ways to be exposed to international equity ETFs focused on quality dividend growth: dynamically currency hedged exposure using DHDG, fully currency-hedged exposure using the WisdomTree International Hedged Quality Dividend Growth Fund (NYSE: IHDG), and currency unhedged exposure with the WisdomTree International Quality Dividend Growth Fund (Bats: IQDG).

As of 4 November 2016, the largest country allocations are to the United Kingdom (18.9%), Switzerland (12.1%), Netherlands (11.0%), Japan (10.4%) and France (6.7%). The largest sectors are consumer discretionary (20.4%), industrials (19.6%), consumer staples (17.7%), health care (17.4%), and information technology (8.8%), and the fund’s top holdings are Unilever (5.8%), British American Tobacco (5.3%), Roche Holding (5.3%), Moet Hennessy Louis Vuitton (3.0%), Reckitt Benckiser Group (2.9%), and Airbus (2.9%).

The fund has a total expense ratio of 0.48% due to a contractual fee waiver in place until 31 October 2017. Its gross expense ratio is 0.96%.

European investors seeking global ETFs with high dividend exposures and quality screens may wish to consider the following funds:

Lyxor SG Global Quality Income NTR UCITS ETF (SGQD LN). TER – 0.45%
UBS ETF DJ Global Select Dividend UCITS ETF (Xetra: UBUM). TER – 0.30%
SPDR S&P Global Dividend Aristocrats UCITS ETF (GLDV LN). TER – 0.45%

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