The wildly popular WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ), this year’s top-asset gathering exchange traded fund by a wide margin, now has a small-cap counterpart with Wednesday’s launch of the WisdomTree Europe Hedged SmallCap Equity Fund (NYSEArca: EUSC).
The new ETF tracks the WisdomTree Europe Hedged SmallCap Equity Index, which like the underlying for HEDJ includes a dividend component. EUSC’s index “is comprised of the bottom 10% of the market capitalization of the European companies traded in Euros from the WisdomTree DEFA Index. The component securities are weighted in the Index based on annual cash dividends paid with the following caps: maximum individual position capped at 2%, maximum sector weight capped at 25%, and maximum country weight capped at 25%,” according to WisdomTree.
The WisdomTree Europe Hedged SmallCap Equity Index sports a dividend yield of nearly 3.6% and is heavily tilted toward mid-caps, or stocks with market values north of $2 billion up to $10 billion. Mid-caps represent nearly three-quarters of the index’s weight, according to issuer data.
EUSC differs significantly from HEDJ, its large-cap stablemate, at the country level. Germany and France, the Eurozone’s two largest economies, combine for almost 51% of HEDJ’s weight. Those countries combine for just over 36% of EUSC’s weight and the new ETF’s largest country weight is 18.7% to Italy. Italy, the Eurozone’s third-largest economy, is EUSC’s largest country allocation at 18.7%, more than eight times the weight HEDJ assigns to that country. [Advantages of Currency Hedged ETFs]
EUSC features another interesting country advantage: A 13.8% weight to Finland, the Eurozone’s top-performing equity market this year. That is more than quadruple HEDJ’s Finland weight.
“When you have inflection points –such as the ECB’s decisive action to undertake quantitative easing (QE) by purchasing government bonds and expand the balance sheet –this may be supportive for equities and designated ‘risk’assets. And typically, small caps are often tied to local economic prospects, more so than globally oriented large caps and therefore, more responsive to shifts in local economic cycles. Small caps could be a favored asset class if the ECB QE program successfully reignites inflation and growth in Europe,” said WisdomTree Research Director Jeremy Schwartz in a statement.
EUSC’s sector weights indicate an ETF that, like HEDJ, is levered to the weak-euro-benefiting-exporters scenario. Industrials and consumer discretionary names combine for 43.5% of the new ETF’s weight. However, EUSC can act as a complement to HEDJ.
“Euro-area small caps tend to have approximately twice the European revenue exposure as euro-area exporters, thereby offering significant complementarity and more direct exposure to any improvements or sensitivity to local economic conditions,” said Schwartz in a note out earlier today. [Taking the Euro out of Small Cap Europe]
If HEDJ is an accurate indication, EUSC could be the beneficiary of good timing. HEDJ has pulled in $5.3 billion in new assets this year, $2.1 billion more than the second-best asset gathering ETF, and will soon become the largest U.S.-listed Europe ETF. [An Important Honor Coming for This ETF]
WisdomTree has enjoyed success with small-cap Europe ETFs as highlighted by the $782.4 million in assets in the unhedged WisdomTree Europe SmallCap Dividend Fund (NYSEArca: DFE). The issuer has also enjoyed some success with small-cap currency hedged ETFs as the WisdomTree Japan Hedged Small Cap Fund (NasdaqGM: DXJS) is close to $100 million in assets less than two years after coming to market.
EUSC, HEDJ and DFE charge 0.58% per year.
EUSC Top 10 Holdings
Table Courtesy: WisdomTree