• The WisdomTree Difference – The WisdomTree Germany Hedged Equity Index (WTGEH), which hedges its currency risk in seeking to mitigate any exchange rate fluctuations from impacting returns, was able to outperform the local German market by an additional 83 basis points. WTGEH is a fundamentally weighted Index that screens and weights companies based on their cash dividends and then repeats this process annually. WTGEH also focuses on exporters, by screening out companies that generate more than 80% of their revenue from within Germany. Exporters have the potential to benefit from global growth even if domestic growth slows and are able to profit from the currency translation adjustment as their home currency weakens against currencies where they sell their goods.
We’ve been writing about currency hedging for some time, and we continue to advocate that, unless you have a strong opinion about the future of a foreign 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 but believe it is still early in the adoption for the hedged concept when applied to German equities. 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.
1Sources: European Central Bank, Bloomberg, as of 9/4/14.
2Source: Bloomberg, 12/31/13–09/18/14.
3Sources: WisdomTree, MSCI, 12/31/87–6/30/14.
4Sources: WisdomTree, Bloomberg, 8/31/11–8/31/14.
Important Risks Related to this Article
Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Investments focused in Europe are increasing the impact of events and developments associated with the region, which can adversely affect performance. Investments in currency involve additional special risks, such as credit risk and interest rate fluctuations.