Europe has had to contend with inflation, Russia’s war in Ukraine, and its broad-reaching impacts, as well as a historically strong U.S. dollar that means the euro and dollar hit parity for the first time in 20 years. Valuations for European equities are deeply discounted, and investors have been flocking to Europe to seize the opportunities.
European exporters are in a promising position to benefit from the depressed price of the euro and the impacts of currencies and the recent annual rebalance of the index that the WisdomTree Europe Hedged Equity Fund (HEDJ) tracks means the fund can seek to capture this potential while hedging out currency fluctuations that would negatively impact returns.
“What may be surprising to some investors is that European equities — despite all the geopolitical and economic turmoil of 2022 — have slightly edged U.S. equities in local currency terms,” wrote Hyun Kang, research analyst at WisdomTree, in a recent blog post.
HEDJ seeks to track the WisdomTree Europe Hedged Equity Index and will invest 95% of its assets in securities within the index under normal circumstances. The index is dividend weighted (based on prior annual dividends) and tilted to favor European exporters who benefit from a weaker euro.
The recent annual rebalances for the WisdomTree Europe Hedged Equity Index meant big additions to the consumer discretionary sector and significant reductions in industrials and materials.
Image source: WisdomTree blog
“These sector weight changes were largely due to the performance of exporters of luxury goods, such as automobiles, that increased their distributions over the past few months. The rebalance bumped two names into the Index’s top 10 holdings: Mercedes-Benz Group AG and Bayerische Motoren Werke AG (BMW) — both German automakers,” Kang wrote.
Post-rebalance, the index reduced its price-to-earnings ratio from 10.42x to 7.03x and increased the dividend yield from 3.56% to 4.22%.
Companies included in the fund have a market cap of at least $1 billion, are domiciled or organized in Europe, trade in euros, and make at least 50% of their revenue from countries outside of Europe. Individual securities are capped at 5% and sector and country weighting is capped at 25% (real estate is capped at 15%).
The fund invests across all market caps but currently consists of mostly large-caps at 84.65%, followed by mid-caps at 14.38%, and small-caps at 0.97% allocation.
HEDJ has an expense ratio of 0.58%.
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