WisdomTree revamps Europe and Japan dynamic currency-hedged ETFs

Apr 3rd, 2019 | By | Category: Equities

WisdomTree has made changes to two dynamic currency-hedged ETFs that provide exposure to the equity markets of Europe and Japan.

Jeremy Schwartz WisdomTree

Jeremy Schwartz, Global Head of Research at WisdomTree.

Effective immediately, the WisdomTree Dynamic Currency Hedged Europe Equity Fund (DDEZ US) and WisdomTree Dynamic Currency Hedged Japan Equity Fund (DDJP US) will switch from passive to active funds and will adopt a multifactor security selection approach.

Prior to the change, the ETFs were linked to in-house indices that covered dividend-paying stocks from European or Japanese equity markets. Constituents were weighted based on annual cash dividends paid.

Going forward, the funds will select European or Japanese equities with the highest expected returns based on proprietary research into fundamental factors, such as value and quality, and technical factors, such as momentum and correlation.

To reflect the change in strategy, the funds have been renamed the WisdomTree Europe Multifactor Fund (EUMF US) and WisdomTree Japan Multifactor Fund (JAMF US). The ETFs are still listed on Cboe BZX, and their expense ratios remain unchanged at 0.43%.

The funds will also retain their dynamic currency hedging process which sets the degree of currency hedging relative to the US dollar between 0% and 100% based on signals such as momentum, interest rate differentials, and value.

  • 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.
  • 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.

Therefore, for example, stronger downward momentum of a foreign currency against the US dollar, an increase in the implied interest rate in the US compared to the foreign country in question, and increases in the foreign currency’s value relative to the US dollar based on purchasing power parity, would all suggest a greater level of currency hedging is required. Conversely, a decline or reversal in any of these signals would trigger a reduction in the percentage of hedging required.

The signals are equally-weighted at one-third each in terms of contribution to the overall portfolio hedge ratio. The hedge ratio is reset on a monthly basis

WisdomTree now offers five multifactor ETFs. The other funds in the suite include the WisdomTree US Multifactor Fund (USMF US), WisdomTree Emerging Markets Multifactor Fund (EMMF US), and WisdomTree International Multifactor Fund (DWMF US). These funds do not offer dynamic currency hedging.

“WisdomTree’s Modern Alpha approach to multifactor investing is designed to provide higher alpha potential with lower volatility and all the benefits of the ETF structure,” said Jeremy Schwartz, Global Head of Research at WisdomTree. “We continue to see value in this approach and are excited to expand our offerings with the restructuring of EUMF and JAMF.”

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