Hedged currency funds have proven to be one of the
popular sub-segments of the ETF universe in
That much is highlighted by the fact that the WisdomTree Japan
Hedged Equity Fund (NYSE:
) is the world's leading ETF in terms of 2013 inflows.
The statistics highlight the allure of the U.S.
dollar/Japanese yen featured in DXJ. On February 7, the ETF had
$2.8 billion in assets under management. DXJ entered trading
Thursday with over $5.4 billion in AUM,
according to WisdomTree data
For all of DXJ's success, it should be noted that this ETF is
not the only game in town when it comes to viable plays on
hedging global currency fluctuations. Investors can, and
arguably, should look to apply the hedged currency strategy to
other regions of the world.
"Oftentimes, U.S. equities appear less volatile than
international equities-not because of volatility in their actual
equity price movements, but rather because of the respective
currency's movements against the U.S. dollar," said WisdomTree
Research Director Jeremy Schwartz in a new research note.
Schwartz highlighted the advantages of hedging euro exposure,
which investors can do with the WisdomTree Europe Hedged Equity
WisdomTree points out
, HEDJ is "designed to have higher returns than an equivalent
non-currency hedged investment when the value of the U.S. dollar
is increasing relative to the value of the euro, and lower
returns when the U.S. dollar declines against the euro."
Said another way, HEDJ is to EUR/USD what DXJ is to
Obviously, investors will want to know if HEDJ has held up
well in the face of fears about Cyprus and increasingly poor
economic data out of the Eurozone. Indeed, the ETF has done just
that. HEDJ has traded slightly higher over the past month while
the Vanguard FTSE Europe ETF (NYSE:
) and the iShares MSCI EMU Index Fund (NYSE:
) are both modestly lower. Neither VGK nor EZU offer a euro
Schwartz notes that removing euro risk from the equation
significantly reduces the volatility investors are subjected
"Removing the euro risk from the equation significantly
lowered the beta of European equities compared to U.S. equities,"
. "It is worth noting that for the 10-year period ending February
28, 2013, exposure to the euro increased the beta of European
Equities by nearly 40%. Over shorter periods, this additional
risk was even more pronounced."
As for HEDJ, only recently have some folks become aware of
this ETF's stellar asset growth, though some presciently
inflows to HEDJ as far back as October 2012
Back then, and it may not sound like much, but HEDJ saw its
AUM total rise to almost $22 million from $13 million in early
The inflows coincided with WisdomTree overhauling HEDJ from an
ETF with multiple region and currency exposures
to a fund focused almost entirely on Eurozone
dividend payers and hedging the common currency
As DXJ does with Japan, HEDJ screens possible constituents to
ensure the fund's holdings are not heavily dependent on the
Eurozone for the bulk of their revenue. If treatment of DXJ is
any indicator, many investors will overlook this important
factor, opting to focus more on HEDJ's euro hedge. Still, the
focus on companies that generate most of their sales overseas as
a critical feature in both DXJ and HEDJ.
After all, there is no getting around the fact that Japan's
domestic economy faces myriad challenges and it could be a while
before the Eurozone offers investors any semblance of economic
Whatever investors' motivations may be, recent returns and
inflows speak for themselves. On January 29,
HEDJ had $39.4 million in AUM
. Today that total is nearly $186 million.
For more on HEDJ, click
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