In effort to reduce exposure to the faltering euro and reduce exposure to Europe-based financial services equities, WisdomTree (NASDAQ:WETF) said it expects to restructure the WisdomTree International Hedged Equity Fund (NYSE:HEDJ) later this month. The announcement was made in a research note penned by WisdomTree Research Director Jeremy Schwartz.
The new HEDJ, "will provide exposure to European dividend-paying companies that derive more than 50% of their revenues from outside of Europe, while hedging the single euro currency."
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HEDJ, which tracks the WisdomTree DEFA International Hedged Equity Index, debuted in late 2009. The fund charges an annual expense ratio of 0.58 percent and has nearly $15.3 million in assets under management.
Given the Eurozone's ongoing battle with its sovereign debt woes, HEDJ has been a pleasant surprise this year, gaining 7.2 percent. That performance has come despite the fact that more than 31 percent of HEDJ's currency weight goes to the euro and almost 22 percent of its sector weight goes to financials.
HEDJ currently offers exposure to 13 currencies, including the euro, but when the fund is restructured, it will focus solely on hedging the euro against the U.S. dollar, according to the research note.
"By hedging a single currency rather than multiple currencies, we anticipate tighter trading spreads, which may result in greater trading volumes and interest in HEDJ," WisdomTree said in the note.
Twenty-two countries are currently featured within HEDJ with the U.K., Japan and Australia combiing for over 48 percent of the fund's weight. Ten Eurozone members are also found in the ETF with France, Germany, Italy and Spain combing for nearly a quarter of the fund's total weight.
Perhaps adding to the case for HEDJ after its rebirth is the fact stock from the European Monetary Union have, on a historical basis, shown a tendency to rise while the euro declines. That scenario bolsters the case for HEDJ reallocating toward Europe-based firms that derive more than half of their revenue outside of the continent.
"Europe has recently been mired in turmoil, and both its equity market and the euro have exhibited uncertainty," Schwartz said. "However, investors may find that the markets mirror sovereign risks rather than specific company fundamentals, which creates opportunities for those aware of the risks.
"One of the primary risks for investors remains the currency movements of the euro compared to the U.S. dollar, but we think exporters who can execute in such an environment could benefit from a weakening euro, which may stoke demand for their products in the global market. If this scenario plays out, an investor may be better positioned in a portfolio of dividend-paying equities that derive more than half their revenues beyond Europe while hedging the euro. In that type of environment we believe that a hedged equity strategy focusing on dividend-paying exporters in Europe has the potential to outperform a strategy that overlooks the impact of a depreciating euro for U.S. investors."
HEDJ, which is home to over 670 stocks, has a 30-day SEC yield of 4.11 percent. After financials and industrials, telecom and consumer staples are the fund's next largest sectors weights, combining for over a third of the ETF's total weight.
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