One of the primary reasons for embracing ex-U.S. stocks is diversification or reducing correlations within U.S.-heavy portfolios. Thanks to single-country ETFs, it’s much easier for U.S. market participants to invest in individual countries than it was in say the 1970s or 1980s. However, smart investors should treat those ETFs as tactical plays. For the bulk of market participants, particularly those approaching international stocks with long-term perspectives, broader ETFs are the way to go. That group includes the WisdomTree Dynamic International Equity Fund (DDWM).
The $1.36 billion DDWM is an alternative to traditional developed market funds, including those tracking the MSCI EAFE Index — a benchmark this ETF has a knack for beating over extended holding periods. DDWM can spruce up domestically concentrated portfolios in need of enhanced diversification. That diversification is critical at times when some markets behave similarly to U.S. large-caps.
“Financial advisors regularly advocate for diversification as a good path to reducing unnecessary risks,” reported KelloggInsight, a publication of Northwestern University’s Kellogg School of Management. “While concentrating a portfolio in a single stock, sector, or country can reap big rewards, it also carries heavy risk. As part of a steady, long-term approach, experts advise spreading funds out across investments that don’t move in tandem.”
DDWM Details
DDWM holds more than 1,400 stocks from 25 countries, confirming its diversification credentials are legitimate. Add to that, none of its holdings account for more than 1.63% of the portfolio, limiting single-stock risk.
DDWM’s geographical breadth is important because there are times when, as noted in a Northwestern study, that global factors affect various equity markets in similar fashion. Indeed, there are periods when local or market-specific factors command the spotlight.
“The secret, the authors found, was identifying the local factors that affect a foreign country’s economy apart from global forces that act on all countries. Pairing the stocks most exposed to those influences with U.S. investments captured the low-risk, high-reward magic of diversification better than merely investing in broader market indexes,” according to KelloggInsight.
Sounds great, but that strategy is tough to for regulator investors to employ. Though not foolproof, DDWM performs some of that heavy lifting for investors. The WisdomTree ETF does so with the benefit of currency hedging, which arguably provides another layer of correlation reduction. It does so by reducing investors’ vulnerability to strong currencies sapping exporters’ profits.
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