So far in 2014, much attention has been paid to the record highs seen periodically in U.S. markets1, responses to central bank and fiscal policies in Japan and Europe and even the volatility and potential valuation case for emerging markets2. One market not discussed as often is broad developed international equities.

Results Are In: 2014 Rebalance

Each year, WisdomTree screens the universe of dividend payers in developed international markets so that we can refocus the weights of constituents back to relative value and away from simply holding increasing amounts of stocks that have performed well. The rebalance was recently completed, suggesting that this is an opportune time to review the positioning of our broad developed international Indexes.

WisdomTree’s Broad Developed International Indexes

Currency Exposure: As a baseline, we know that the MSCI EAFE Index has 30% to 33% exposure to the euro, and about 19% to 21% exposure to both the yen and the pound3. In terms of divergences of interest:

o Japanese yen: The WT International MidCap and WT International SmallCap Dividend Indexes have clear over-weights to the yen, compared to the MSCI EAFE Index, whereas the other Indexes represent significant under-weights.
o Euro: The WT International Dividend ex-Financials Index is interesting for its nearly 36% exposure to Eurozone. This Index has performed strongly in 2014, helped by its significant weight in European Utilities.
o WT International Hedged Dividend Growth Index: This is the only Index shown that is actually currency-hedged. Each of the other Indexes will be impacted by the movements of their underlying currency exposures versus the U.S. dollar, but this Index will not, making it very interesting for those thinking that the macroeconomic picture suggests the potential for a strengthening U.S. dollar relative to other developed-market currencies.

Cyclicals vs. Defensives: As one looks from the WT International LargeCap Dividend Index down the continuum of the size spectrum to the WT International SmallCap Dividend Index, there is a notable ramp up—almost 25% (from 60.8% in large caps to 84.5% in small caps)—in terms of exposure to cyclical sectors. This fits with an important theme: those bullish on the prospects for an economic recovery should consider small caps.

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