After the incredible success of their hedged Japan product, (DXJ - ETF report), WisdomTree has been putting several other hedged products into the pipeline. The first of these hit the market earlier in the summer, with the debut of the Japan Hedged SmallCap Equity Fund (DXJS) and the WisdomTree United Kingdom Hedged Equity Fund (DXPS - ETF report).
However, the trend isn’t stopping there as WisdomTree has put out another product in this hedged space, this time focusing on Europe’s largest economy, Germany. This new product, the WisdomTree Germany Hedged Equity Fund (DXGE - ETF report), looks to give broad exposure to German stocks, while also taking out the influence from the euro currency for dollar denominated investors.
German Hedged ETF in Focus
The new ETF looks to track the WisdomTree Germany Hedged Equity Index, charging investors 48 basis points a year in fees for the exposure. The benchmark has roughly 70 companies in its basket, and it looks to neutralize exposure to the fluctuations of the euro relative to the U.S. dollar (see all the European ETFs here).
Investors should also note that the product is tilted towards exporters, or companies that have a significant global revenue base. These firms could do the best when the euro is struggling, so taking a euro neutral approach to stocks of these companies could be an excellent idea.
In terms of the portfolio, the ETF is well spread out among individual securities, with four companies making up at least 5.3% of assets including BMW, Siemens, Daimler, and Deutsche Telekom. The fund has a definite large cap focus too, with over 80% of the portfolio going to large cap companies.
For industries, automobiles and components takes the top spot at over 18%, followed by capital goods (11.7%), materials (10.9%), and insurance (10.2%). This gives the product a focus on consumer discretionary, industrial, and financial segments, while keeping DXGE light in technology, consumer staples, and save for Deutsche Telekom, light in telecoms as well.
It is also worth pointing out that the index focuses only on dividend-paying companies that are incorporated in Germany, giving the product an income focus. In fact, the dividend yield comes in at about 3.4% for the index, so it could definitely be a source of income for European ETF investors (also read 3 European ETFs in Focus on German Election Results).
How does it fit in a portfolio?
This ETF may be an interesting choice for investors who believe that the euro currency is going to decline, though they still want access to the German market. Additionally, the fund may be a solid income destination, along with a decent choice for those seeking a tilt towards the consumer and industrial segments.
The fund may not be appropriate, however, for those who believe that the euro is going to increase in value, as this product will likely underperform its unhedged counterparts when this is the case. The ETF may also not be much of a growth story, as it appears to have a bit of a large cap value focus.
ETF Competition and Bottom Line
There are several competing ETFs in the German market, any of which could pose as foes for the new WisdomTree ETF. The most popular is easily the (unhedged) iShares MSCI Germany ETF (EWG - ETF report) which has over $5 billion in AUM and average volume above three million shares a day (see all the Top Ranked ETFs here).
Beyond that large cap fund, there are also some other competitors such as the First Trust Germany AlphaDEX Fund (FGM) and two small cap names; EWGS and GERJ in the space as well. The real competitor though looks to be the db X-trackers MSCI Germany Hedged Equity Fund (DBGR - ETF report).
This product is a bit pricier than the new WisdomTree fund, though it also uses a hedging technique in order to strip out the impact from the euro currency. It has also been on the market since 2011, giving it a huge head start, though the assets still aren’t there for this fund.
Given this low interest so far, it is debatable if investors will support a second product in the hedged German ETF market. This is especially true if the euro remains stable, as it took a huge decline in the value of the yen to make investors take notice of hedged Japan products (read the Key to International ETF Investing).
Should this happen though, investors may embrace these hedged products for a different type of German exposure. But even if the euro remains stable, DXGE could still be an interesting choice as it is actually one of the highest yielding and cheapest funds targeting Germany, so it could see some inflows just for these reasons alone, though only time will tell if the hedging technique pays off in the German market too.
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