The year 2013 has so far been rewarding for WisdomTree, thanks to the surging asset base of many of its products. Growing investor interest in the ultra-popular Japan Hedged Equity Fund (DXJ - ETF report) is a case in point. The fund has seen massive inflows of nearly $8.2 billion in the first half of the year, taking the total asset base to $10.3 billion.
The issuer has also enjoying the attention that is being paid to many of its other international products, which make up a decent chunk of its offering. This burst of success has encouraged WisdomTree to introduce two more currency-hedged funds: Japan Hedged SmallCap Equity Fund (DXJS - ETF report) and the United Kingdom Hedged Equity Fund (DXPS - ETF report), while putting many others in the pipeline.
The new funds look to add investor options for targeting Japan small caps and securities from the United Kingdom without worrying about a slump in their respective local currencies. Below, we have highlighted some of the other key details for these new funds which could be intriguing picks for investors seeking new ways to target these important markets:
DXJS in Focus
This fund looks to offer exposure to small cap Japanese stocks while, at the same time, provide hedge against any fall in the Japanese yen (read: As Yen Weakens, Currency Hedged ETFs Soar). This will be done by tracking the WisdomTree Japan Hedged SmallCap Equity Index.
The fund charges 58 bps in fees per year from investors, and looks to use a dividend weighting methodology. The included companies must be based in Japan, should have paid out at least $5 million in cash dividends in the prior year, and are required to have a market cap of at least $100 million.
The ETF holds about 528 securities that are widely spread out across a number of companies. None of the securities hold more than 0.7% of the total assets, suggesting no concentration risk. From a sector look, consumer discretionary and industrials take the top two spots with a combined 50% share.
In terms of the currency hedge, the fund looks to enter into forward currency contracts or futures designed to offset exposure to the Japanese yen. Thus, the fund looks to outperform when the yen is sliding, and underperform unhedged benchmarks when the yen is strengthening (read: Japan ETFs Crumble After Prime Minister's Speech).
With that being said, the new fund is likely to attract investor interest as the hedged exposure technique has already seen wide acceptance for Japan investing. In addition, DXJS is the first currency hedged ETF providing exposure to Japanese small caps that have been trading at a discount to large caps over the past few years, making them attractive choices at the current levels.
With respect to the unhedged small cap Japan funds, there are currently two ETFs in the market. More popular between the two is the WisdomTree Japan SmallCap Dividend Fund (DFJ - ETF report), which has amassed nearly $234 million in AUM and charges 58 bps in fees and expenses (read: Small Cap Japan ETFs: Overlooked Winners?).
DXPS in Focus
This ETF looks to track the WisdomTree United Kingdom Hedged Equity Index, which is dividend weighted and provides exposure to British shares. It offers a unique way to capitalize the returns from the leading U.K. firms while hedging exposure to the British pound.
The fund manages a basket of 140 stocks, which are somewhat concentrated in its top 10 holdings with 47% of assets. Vodafone (VOD), GlaxoSmithKline (GSK), and Royal Dutch Shell (RDS.A) take the top spots with a combined 15% plus share (read: Are UK ETFs in Serious Trouble?).
In terms of sector exposure, the product has a slight tilt towards consumer staples, financials and energy each comprising at least 17% share in the basket. The fund charges 48 bps in annual fees.
Like the Japanese fund, this ETF also seeks to outperform when the pound weakens, and underperform when the pound is surging against the U.S. dollar (read: Tough Times Ahead in Commodity Currency ETFs?).
With respect to competition, while there is no direct competitor, the largest and ultra-popular iShares MSCI UK Index Fund (EWU - ETF report) still poses risk to the success of the new ETF. However, the product would get the first mover advantage in the UK space, as DXPS is the only currency hedged ETF for the British market.
Can They Succeed?
Currency hedging appears to be a good strategy in the current market as the Fed’s planned tapering of bond purchases later this year could increase interest rates. While the rising interest rate environment is good for global markets, it might further dampen foreign currencies which are already depressed relative to the U.S. dollar (read: 3 Currency ETFs Hit Hard By Taper Talk).
As such, these products could see big inflows if market conditions remain the same, and if international investing—without the dollar—remains popular in the second half of the year.
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