We believe that when a fund ranks number one in a particular investment category, it deserves some attention. This is particularly true when the fund category is generating a lot of attention as a valuation opportunity relative to the United States.
As of October 31, 2014 The WisdomTree Europe Hedged Equity Fund (HEDJ) was ranked the number one fund, by MorningStar, out of 109 Europe-focused open-ended (OE) mutual funds and exchange-traded funds (ETFs) over the past year based on total return.1 HEDJ is alone at the top, in our view illustrating the impact that a depreciating euro has had on unhedged investment options within this category. Given the policies being discussed and employed by the European Central Bank (ECB), it is hard to imagine a stronger euro compared to the U.S. dollar in the near future.
So given this low euro environment, why layer the currency risk on your European equity investments? What if the problem with Europe isn’t its equity market but rather the euro? HEDJ’s performance indicates that its constituents at the equity level may have a chance to hold up even in the face of a depreciating currency.
HEDJ vs. the Morningstar Europe Stock Peer Group (9/1/12–10/31/14)
HEDJ Average Annual Returns, as of 9/30/14
The Anatomy of HEDJ
HEDJ is designed to track the returns of the WisdomTree Europe Hedged Equity Index after costs, fees and expenses. The WisdomTree Europe Hedged Equity Index:
• Hedges the impact of the euro’s return versus the U.S. dollar, such that the return experience is that of the local European equities.
• Requires constituents to generate at least 50% of their revenues outside of Europe, tilting the exposure toward multinational exporters that have the potential to benefit, over time, from a weakening euro.
• Rebalances back to a measure of relative value—dividends paid—on an annual basis, such that the road to greater constituent representation runs through increasing dividends over time and not through increasing market capitalization
HEDJ & the Beauty of a “Plain Vanilla” Approach
ECB president Mario Draghi has stated that returning the ECB’s balance sheet to March 2012 levels—an expansion of 1 trillion euros from current levels—is a primary policy goal.2 Since this policy, along with any other designed to stoke inflationary potential, should encourage a weakening of the euro, we think that hedging the currency risk and focusing on plain-vanilla exposure solely to European equities is an important consideration. We’ve seen from HEDJ’s results that it can have a big impact on the returns experienced over time.
1Source: Morningstar. Refers to period 10/31/13–10/31/14.
2Source: Sumanta Dey, “ECB must expand balance sheet by 1 trillion euros to lift inflation,” Reuters, 10/29/14.
Important Risks Related to this Article
Dividends are not guaranteed, and a company’s future ability to pay dividends may be limited. A company currently paying dividends may cease paying dividends at any time.
There are risks associated with investing, including possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Investments in currency involve additional special risks, such as credit risk and interest rate fluctuations. Derivative investments can be volatile, and these investments may be less liquid than other securities, and more sensitive to the effects of varied economic conditions. As this Fund can have a high concentration in some issuers, the Fund can be adversely impacted by changes affecting those issuers. Due to the investment strategy of this Fund, it may make higher capital gain distributions than other ETFs. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.