WisdomTree believes currency risk is one of the most important risk factors when investing internationally, and we think investors are well served to adopt strategic currency-hedging
mandates as part of their baseline portfolios.
There were large flows targeting broad-based international currency-hedged strategies last year.1
However, international markets have experienced a sell-off since mid-2015, so many investors have seen losses on those newly allocated positions.
Most people think about tax planning just at year-end, but anytime there are significant pullbacks in the market, we think there is an opportunity to rotate into other strategies and book a loss.
The broad international markets, on a currency-hedged basis, are down approximately 20% from their highs in middle of 2015.2
We think a 20% dip is a tax-loss
opportunity. So where should investors turn?
The WisdomTree International Hedged Quality Dividend Growth Fund (IHDG): Value Added through Stock Selection and Strategic Currency Hedging
We discussed why quality
has been an important factor during volatile
periods. We believe this strategy is a good option for those who believe in the risk-reduction properties of currency hedging over a long-run basis but also want to try to add value through a factor approach to stock selection focused on companies with high return on equity (ROE)
, high return on assets (ROA)
and better long-term growth prospects.
Illustrating “Quality” through Tilting Toward Higher Return on Equity
In the chart below, we have broken the constituents of the WisdomTree International Hedged Quality Dividend Growth Fund into quartiles based on each one’s three-year average ROE figures. We then show the aggregate security weight for each quartile to illustrate how IHDG tilts toward securities with higher return on equity.
Average Annual Returns, as of December 31, 2015
For definitions of indexes in the charts, visit our glossary.
This strategy is dividend weighted
, so it also incorporates a relative value rebalancing
discipline, in addition to its quality stock selection focus. While adding value through its stock selection, this Index maintains a high correlation
to international benchmarks on a local currency basis (0.97 to the MSCI EAFE Index
, measured in local currency), but due to the currency hedge, it has a lower correlation to the traditional MSCI EAFE Index with currency exposure (0.89 correlation).3
The WisdomTree Dynamic Currency Hedged International Equity Fund (DDWM): Dynamic Currency-Hedging International Equities
One question investors may ask is how to decide when it is best to rotate into hedged strategies from unhedged strategies—and vice versa. Now that currency hedging has become a popular tool, how does an investor know if it’s becoming less attractive to hedge?
We’d point out that hedging has important volatility-reducing properties, and these hedged strategies should really serve as a good baseline portfolio. But if an investor wants a tactical hedging element, WisdomTree has created a solution that incorporates a more tactical currency hedge based on factors we found to be most important in driving currency movements over time.
The dynamic currency hedge in the WisdomTree Dynamic Currency Hedged International Equity Index
tracked by DDWM before fees, uses the same equity index that has more than nine years of real-time results,4
but it layers a dynamic currency hedge on top of it. The WisdomTree International Equity Index has tracked the MSCI EAFE Index with a 0.99 correlation5
—showing very close tracking to the broad international benchmark—but it has done so while also delivering higher returns than the MSCI EAFE Index since its inception.
Access the standardized performance of DDWM here
Read more about the indexing process underlying DDWM here
WisdomTree believes DDWM and IHDG could serve as a replacement for core international allocations—whether hedged or unhedged. Utilizing a tactical tax-loss-harvesting opportunity could be an excellent way to rotate into these strategies for the long term, in our view.
Source: Bloomberg, as of 12/31/15.
Source: Bloomberg. Measures period from approximately 8/10/15 to 1/15/16 for the MSCI EAFE US Dollar Hedged Index.
Source: Bloomberg. Measured from the inception of the WisdomTree International Hedged Quality Dividend Growth Index on 12/2/13 to 1/15/15.
Refers to the WisdomTree International Equity Index
, with an inception date of 6/1/06.
Source: Bloomberg, from 6/1/06 to 12/31/15.