We believe that when a fund ranks number one in a particular investment category, it deserves some attention. This is particularly true when the fund category is generating a lot of attention as a valuation opportunity relative to the United States.
As of October 31, 2014 The WisdomTree Europe Hedged Equity Fund (HEDJ)
was ranked the number one fund, by MorningStar, out of 109 Europe-focused open-ended (OE) mutual funds
and exchange-traded funds (ETFs) over the past year based on total return.1
HEDJ is alone at the top, in our view illustrating the impact that a depreciating euro has had on unhedged
investment options within this category. Given the policies being discussed and employed by the European Central Bank (ECB), it is hard to imagine a stronger euro compared to the U.S. dollar in the near future.
So given this low euro environment, why layer the currency risk on your European equity investments? What if the problem with Europe isn’t its equity market but rather the euro? HEDJ’s performance indicates that its constituents at the equity level may have a chance to hold up even in the face of a depreciating currency.
HEDJ vs. the Morningstar Europe Stock Peer Group (9/1/12–10/31/14)
HEDJ Average Annual Returns, as of 9/30/14
The Anatomy of HEDJ
HEDJ is designed to track the returns of the WisdomTree Europe Hedged Equity Index
after costs, fees and expenses. The WisdomTree Europe Hedged Equity Index:
the impact of the euro’s return versus the U.S. dollar, such that the return experience is that of the local European equities.
• Requires constituents to generate at least 50% of their revenues outside of Europe, tilting the exposure toward multinational exporters that have the potential to benefit, over time, from a weakening euro.
back to a measure of relative value—dividends
paid—on an annual basis, such that the road to greater constituent representation runs through increasing dividends over time and not through increasing market capitalization
HEDJ & the Beauty of a “Plain Vanilla” Approach
ECB president Mario Draghi has stated that returning the ECB’s balance sheet to March 2012 levels—an expansion of 1 trillion euros from current levels—is a primary policy goal.2
Since this policy, along with any other designed to stoke inflationary
potential, should encourage a weakening of the euro, we think that hedging the currency risk and focusing on plain-vanilla exposure solely to European equities is an important consideration. We’ve seen from HEDJ’s results that it can have a big impact on the returns experienced over time.
Source: Morningstar. Refers to period 10/31/13–10/31/14.
Source: Sumanta Dey, “ECB must expand balance sheet by 1 trillion euros to lift inflation,” Reuters, 10/29/14.