Over the past six months, the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) has gone from a strategy that was receiving very little attention, to the fastest growing exchange-traded-fund (ETF), in terms of inflows YTD1.
Many international equity ETFs provide local equity exposure and currency exposure to investors.
DXJ is different: We strive to give investors access to the Japanese equities market while neutralizing the effect of the currency on the total return. [WisdomTree Japan ETF Thumped as Yen Rallies]
Let’s break down how we manage the yen hedge and how investors should think about the values being presented to them on a daily basis.
Fund Mechanics:
In the DXJ portfolio, we seek to neutralize the currency exposure of investing in Japanese equities. At the end of every month, the Fund portfolio manager enters into non-deliverable forward contracts to hedge the yen exposure in the portfolio. We enter into contracts that approximately equal the market value of the equities in the portfolio. Throughout the month, the yen moves up and down and the equities move up and down based on the Japanese equity and currency market. They will normally move independently of one another. When a creation of new shares occurs mid month, we take in more equities and we enter into new forward contracts to match the notional for the new creation of shares. At the end of the month, we roll all the forwards2, entering into new 30-day forward contracts to bring the currency hedge back in line with the notional amount of equities in the Fund.
ETF Valuation Metrics:
When looking at ETFs with international underlying securities, it is also important to understand what goes into each value you are observing. Are the underlying markets opened or closed at the time the ETF is trading? In DXJ’s case, during U.S. trading hours, the Japanese equity market is closed. The different values published can help with your overall understanding of how the ETF trades and is priced on the secondary market.