Shares of the WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ) are up 1.6% Thursday on volume that appears poised to easily eclipse the daily average after the European Central Bank unexpectedly lowered interest rates.
The Eurozone’s benchmark borrowing rate has been pared to 0.05% from 0.15% while its marginal lending facility has been lowered to 0.3% from 0.4%. The ECB’s deposit facility is now deeper in negative territory at -0.2% from -0.1%.
The ECB news has the CurrencyShares Euro Currency Trust (NYSEArca: FXE) lower by 1.4% on above average volume, extending a tumble that saw FXE enter Thursday’s session with a three-month loss of 3.4%. The PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) and the WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEArca: USDU) are loving the ECB news as both are trading noticeably higher on the day. [Dollar’s Rise Good for These ETFs]
So is HEDJ, one of this year’s fastest-growing ETFs. At a time of sustained euro weakness, HEDJ’s utility becomes apparent on multiple, an assertion confirmed by the fact that the ETF is one of the top non-leveraged performers to this point in Thursday’s session while the Vanguard FTSE Europe ETF (NYSEArca: VGK), which does not hedge currency exposure, is trading slightly lower. [Game Time for Europe ETFs]
“We continue to advocate that, if an investor isn’t sure of the future direction of an international currency—in this case the euro—the baseline exposure should not be in a 100% unhedged approach. We’ve seen strong interest in currency hedging within the broader eurozone region,” said WisdomTree Research Director Jeremy Schwartz in a note out last month. “Given European Central Bank policy and the trend of the euro, we believe it could be time to think about currency hedging of both broad, eurozone-related equities and German equities.”
That is another reminder of HEDJ’s usefulness as the euro loses steam. While VGK and rival Europe ETFs allocate, in some cases, over 40% of their combined weights to the U.K. and Switzerland, which are not Eurozone nations, HEDJ is a dedicated Eurozone ETF.
HEDJ features exposure to 10 Eurozone nations, with Germany, France and Spain, three of the region’s four largest economies; looming large at roughly 70% of the ETF’s combined weight.
Cementing HEDJ’s status as the right Europe ETF for the current environment is an index construction that emphasizes exposure to dividend-paying exporters. Translation: HEDJ investors get added leverage to the companies that stand to benefit most from a weak euro with the advantage of a dividend kicker. HEDJ’s dividend bonus is arguably under-appreciated. The ETF’s distribution yield is almost 4.7%, according to WisdomTree data, compared to a trailing 12-month yield of just over 4% for VGK.
The dividend advantage should be appreciated because European dividends are, finally, once again growing. “European companies paid out $153.4 billion in the second quarter, up 18.2 percent year-on-year and the best performance on a constant currency basis in at least five years,” Reuters reported, citing Henderson Global Investors. Prior to that data being released last month, it was known that ex-U.K., European dividends have risen just 8% since 2009, indicating the continent has the potential to deliver robust payout growth going forward. [European Dividends on the Rise]
Investors have clearly warmed to the HEDJ story. The ETF topped $1 billion in assets under management in April, but entered Thursday with nearly $2.4 billion in AUM.
HEDJ vs. VGK
Chart Courtesy: ETF Replay