• Why Europe/Japan May Be Opportunely Focused Blend: Since the WisdomTree Europe Hedged Equity Index focuses solely on equity markets that use the euro currency, the United Kingdom (approximately 21% of MSCI EAFE) and Switzerland (approximately 9% of MSCI EAFE)4 are missed. The only other market with a greater than 5% weight in the MSCI EAFE that is missed is Australia (approximately 8% of MSCI EAFE) . We’d note that the case for central bank policy divergence is the most clear with Europe and Japan—the United Kingdom is actually close to hiking rates alongside the U.S. Federal Reserve, and the cost to hedge Australia currency exposure is higher due to the country’s higher short-term interest rates. Investors may therefore think this blended combination of currency hedging Europe and Japan is where to focus the currency hedge part of international benchmarks.
Currency Hedging Becoming a More Important Consideration: The difference between EAFE in local currency and EAFE in U.S. dollars has been widening, starting from July 2014 when the yen (-12.86%), the euro (-6.84%) and the pound (-6.98%) depreciated against the U.S. dollar, with specific levels of depreciation noted in parentheses5. The one-month interest rate differentials between the Euro and the Yen contribute to making the current cost to hedge these currencies inexpensive. Given the uncertain nature of exchange rates, we believe at least blending in partial currency hedges makes sense for international investors, and the 60/40 Europe/Japan blend discussed in this piece is where we’d begin the focus.
1Broad international benchmarks: Refers to the MSCI EAFE Index and the MSCI EAFE Local Currency Index, as measures of the performance of developed international equities with and without the risk of fluctuating currencies against the U.S. dollar.
2Source: Bloomberg for data on exposures within the MSCI EAFE Index as of 11/25/14. Subject to change.
360% Europe/40% Japan hedged equity blend: Refers to a 60% weight to the WisdomTree Europe Hedged Equity Index and a 40% weight to the WisdomTree Japan Hedged Equity Index, rebalanced annually.
4Source: Bloomberg for data on exposures within the MSCI EAFE Index as of 11/25/14. Subject to change.
5Source: Bloomberg, with depreciation versus U.S. dollar measured from 7/31/14–11/25/14.
Important Risks Related to this Article
Investments focused in Japan are increasing the impact of events and developments associated with the region, which can adversely affect performance. 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.