WisdomTree

Currency Hedged Equity, Dividends, Equity, Small Caps

Introducing the WisdomTree Global Hedged SmallCap Dividend Fund

by Tripp Zimmerman, Associate Director of Research on November 19, 2015

WisdomTree has been a pioneer in two important categories of indexes and exchange-traded funds (ETFs): small-cap equities and currency-hedged equities. For more than nine years, WisdomTree has offered solutions for small-cap dividends in various regional and country markets, including the United States, developed international, Europe, Japan and emerging markets. With the launch of the WisdomTree Global SmallCap Dividend Index (WTGS) and the WisdomTree Global Hedged SmallCap Dividend Index (WTGSH), WisdomTree combines our innovative small-cap dividend methodology into a global index and also allows the choice to currency hedge. WTGSH’s selection and weighting methodology is exactly the same as WTGS.

In summary, WTGSH is a fundamentally weighted index that measures the performance of the 1,000 largest small-capitalization companies that rank within the bottom 5% of the WisdomTree Global Dividend Index by market capitalization and is designed to remove from index performance the impact of changes to the value of foreign currencies compared to the U.S. dollar.
 
Does It Make Sense to Layer Currency Exposure on Top of Equities?

Small companies can offer big potential the world over—and approximately 50% of the world’s investment opportunities are outside the United States.1 So, in our opinion, there is no question that investing globally is a smart idea—whether the investor hedges the currencies or not. Currencies have sometimes pushed returns higher, but also lower, so the question then becomes whether investors want to take on the additional risk. Unhedged international strategies inherently have a bullish opinion on foreign currencies. So for investors without an opinion on currency direction, hedged strategies can make a lot of sense. Plus, it’s worth noting that currency-hedged strategies provide access to the local equity returns as they essentially mitigate currency risk. We often hear from WisdomTree investors that they use hedged and unhedged strategies together. Consider that:
 
Currency Adds Risk, Not Returns: During the full period available, from May 31, 1994, to September 30, 2015, and every subperiod, currency exposure detracted from the returns of the MSCI ACWI Small Cap Index.
MSCI ACWI Small Caps without Currency Saw Higher Sharpe Ratios in Every Period: For each period shown, removing the currency exposure raised the Sharpe ratio. This higher Sharpe ratio for the currency-hedged Index indicates just how much additional volatility came with the currency risk.
Higher Current Correlation: In looking at the correlation between currency and equity, we see that over the full period, the correlation coefficient was 0.26, but over the last five-year period it was 0.55 (twice as high), and over the most recent 10-year period it was 0.52. This shows a trend of currency risk increasing.
 
Currency Exposure Increases Volatility
Currency Exposure Increases Volatility
Given the consistent volatility reduction when currency risk has been removed, investors can see how currency-hedged strategies might serve as a better strategic baseline exposure for global equities—and that the active decision would be to add in the currency risk if/when an investor has a positive view on it. Very few dividend funds focus on global small-cap companies, and even fewer hedge the currency risk.2

Now, with the launch of the WisdomTree Global Hedged SmallCap Dividend Fund (HGSD), investors can capture the performance of a broad basket of small-cap dividend payers across the globe in one ETF, while also mitigating currency risk. HGSD is designed to track the performance of the WTGSH before fees and expenses. Although WTGSH is a newly constructed index, the methodology at its core uses the same fundamental rules-based process WisdomTree has been implementing in small caps around the world for almost a decade and the same currency-hedging methodology WisdomTree pioneered.
 
 
 
 
1Sources: WisdomTree, 10/31/15.
2Sources: WisdomTree, Bloomberg, 10/31/15.

Important Risks Related to this Article

There are risks associated with investing, including possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Investments in emerging, offshore or frontier markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation and intervention or political developments. Funds focusing their investments on certain sectors increase their vulnerability to any single economic or regulatory development. The Fund uses various strategies to attempt to minimize the impact of changes in applicable foreign currencies against the U.S. dollar, which may not be successful. Derivative investments can be volatile, and these investments may be less liquid than other securities, and more sensitive to the effects of varied economic conditions. The Fund invests in the securities included in, or representative of, its Index regardless of their investment merit, and the Fund does not attempt to outperform its Index or take defensive positions in declining markets. A Fund that has exposure to one or more sectors may be more vulnerable to any single economic or regulatory development. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile. 

Hedging can help returns when a foreign currency depreciates against the U.S. dollar, but can hurt when the foreign currency appreciates against the U.S. dollar.

Dividends are not guaranteed, and a company’s future ability to pay dividends may be limited. A company currently paying dividends may cease paying dividends at any time.

 

 

 

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