Take U.K. Stocks, Leave the Sterling


Japan has two. Even Brazil has one. So why not a hedged currency ETF for the U.K.? Today's debut of the WisdomTree United Kingdom Hedged Equity Fund (NYSE: DXPS) takes care of that as the new ETF becomes the first to offer investors of a way of investing in U.K. stocks while hedging fluctuations in the British pound/U.S. dollar currency pair (GBP/USD).

Issuer WisdomTree has already attained success on the currency hedged front with the $9.4 billion WisdomTree Japan Hedged Equity Fund (NYSE:DXJ). The WisdomTree Europe Hedged Equity Fund (NYSE:HEDJ). That ETF was converted to a hedged euro dividend ETF last August. That helped ratchet the fund from relative to obscurity to raking in almost $280 million in assets this year.

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The WisdomTree United Kingdom Hedged Equity Fund looks to build on that success and will be in direct competition with the unhedged iShares MSCI United Kingdom Index Fund (NYSE:EWU).

"We believe DXPS offers investors a unique way to capitalize on the growth potential of leading global companies in the U.K while hedging exposure to the British pound. Moreover, we believe the upcoming appointment of Mark Carney as Governor of the Bank of England (BOE) represents a potential near-term catalyst, with Carney's reputation as a forward thinking Governor who may enact bold policies to reinvigorate the U.K economy", said WisdomTree Research Director Jeremy Schwartz.

There are obvious advantages to hedging the yen, namely that Japanese stocks benefit from a weak currency. Additionally, the euro is viewed by many market observers as overvalued relative to other developed market currencies, potentially putting HEDJ in a position to benefit if the European Central Bank employs additional stimulus measures.

But what about hedging the pound? Is this a move investors should consider? The data indicate the answer is "yes." Over the past decade, investors could have trimmed volatility in U.K. stocks by about 430 basis points by hedging pound exposure, according to WisdomTree.

In the past 12 months, the volatility for the iShares MSCI United Kingdom Index, the index tracked by EWU, is 8.08 percent. Remove sterling from the equation and that number drops to 6.48 percent.

At the sector level, DXPS is dominated by staples, financial services and energy names with those groups combining for over 54 percent of the ETF's weight. Material and health care also receive double-digit allocations.

Top-10 holdings in the new ETF include a familiar batch of U.S.-listed names such as Vodafone (NYSE:VOD), BP (NYSE:BP), Royal Dutch Shell (NYSE: RDS-A) and BHP Billiton (NYSE:BHP).

DXPS has an annual expense ratio of 0.48 percent, slightly lower than the 0.5 percent charged by the $2 billion EWU.

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