2013 has been a great year for WisdomTree as the firm has seen its total asset base surge. While many of its funds have become more well-known, the biggest inflows were seen in their now ultra-popular Japan Hedged Equity Fund (DXJ - ETF report).
The fund has seen over $4 billion in net inflows to start the year, catapulting the fund to the top of the charts in this measure. Furthermore DXJ is now up to over $6 billion in total assets, making the ETF the most popular fund in the company’s nearly 50 fund lineup (also see WisdomTree Files for New International ETF).
Clearly, investors are beginning to see the promise of currency-hedged investing, and how it can provide tremendous gains for a portfolio. Probably due to this success, WisdomTree has now put into registration three more products that hedge out currency risks for investors.
These new funds, if ever approved, look to target three distinct markets around the globe, Korea, Japan (small caps), and Great Britain. Thus, American investors may soon have even more options to target international securities without worrying about a slumping local currency or a surging dollar.
However, investors should note that these filings are just initial ones, and that many of the key details weren’t released to the SEC at this time, such as expense ratios and ticker symbols. Still, a good deal of information was provided to investors and we have highlighted some of the key points in the filings below:
Japan Hedged SmallCap Equity Fund
This proposed fund looks to hedge out exposure to the yen while still providing access to small cap Japanese stocks. This looks to be done by following the WisdomTree Japan Hedged SmallCap Equity Index.
This benchmark is dividend weighted and also looks to have a tilt towards stocks that have big global operations, and thus a great deal of exports (and currency exposure). Firms included must also be incorporated within Japan, have paid out at least $5 million in cash dividends in the prior year, and have a market cap of at least $100 million.
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 (see Japan ETFs: Six Ways to Play the Surge).
For comparable unhedged ETFs already on the market, investors have WisdomTree’s (DFJ - ETF report). This product is relatively popular with $190 million in assets, though it could face some cannibalization from this new entrant if ever launched.
United Kingdom Hedged Equity Fund
For a European hedged play, investors may soon have a WisdomTree option for the British market. This proposed fund looks to provide access to British equities, but also hedge out exposure against the pound as well.
This looks to be done by following the WisdomTree United Kingdom Hedged Equity Index, a dividend weighted index that provides exposure to British shares. Unlike the previous fund though, this product will not focus in on small caps and will instead have a wide focus (see Are UK ETFs in Serious Trouble?).
The product will tilt towards firms that have a significant global revenue base though, so at least that aspect will be similar to the Japanese ETF. In addition, investors should note that this product looks to only hold stocks that have paid at least $5 million in cash dividends in the prior year, have a daily dollar volume level of at least $100,000, and at least $1 billion in market cap.
The fund also seeks to outperform during times when the market is seeing pound weakness, and underperform when the pound is surging against the U.S. dollar. While there aren’t a whole lot of competitors, easily the biggest British ETF is (EWU - ETF report), so that could pose as some stiff competition.
WisdomTree Korea Hedged Equity Fund
Korean investments are very interesting at this time, as they can be quite volatile thanks to geopolitical worries. Additionally, they are also quite fond of easing and can often experience a deprecating currency like their Japanese counterparts.
For these reasons, this proposed ETF could be reasonably popular with investors who are looking to avoid at least some of these issues. This looks to be done by tracking the WisdomTree Korea Hedged Equity Index, a benchmark of Korean-listed stocks that have at least $5 million in net income in the prior year (also see Direxion Launches 2 Emerging Market Leveraged ETFs).
This means that this proposed ETF will not be using dividends as a filter, unlike the other two on the list. However, it will—like the other two—hone in on companies that do a big chunk of their business outside the domestic market, as these are more impacted by currency issues.
The fund will also seek to outperform when the Korean won is weakening relative to the U.S. dollar, while it will likely underperform when the won is experiencing strength against the USD. In terms of competition, the main player in the space is (EWY - ETF report), which is quite popular but unhedged against currency fluctuations.
Can they succeed?
It is hard to see if these currency-hedged ETFs will succeed if they are approved. For quite some time, DXJ was relatively unpopular and the fund only caught on once the massive easing campaign in Japan reached its latest stage (see Q1 ETF Asset Report: Japan ETFs Reign).
However, once the fund started gaining some inflow momentum, nothing stopped it from catapulting up the charts. It also didn’t hurt that this fund saw a huge level of outperformance when compared to the unhedged competitor of (EWJ - ETF report).
So, it is possible that these ETFs could see some inflows (if approved), but they will probably need some outside help as well. Expenses are bound to be higher in this space, but as we have seen with DXJ, investor interest can definitely be there when the conditions are right.
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