Due to the incredible success of the
Japan Hedged Equity Fund (
, WisdomTree has been quickly stuffing more hedged-equity
products into the pipeline. Just last week the company
revealed plans for a few more hedged ETFs
targeting markets like Japan small caps, Great Britain, and South
While this represents a potentially big bet on the
hedged-equity ETF strategy, it also appears that WisdomTree isn't
done just yet, as it has put out
documents with the SEC
for another product with this focus in a brand new filing. This
time though, the fund looks to focus on Germany while hedging out
the euro for its exposure.
Germany Hedged Equity Fund in Focus
This in-registration product looks to track the WisdomTree
Germany Hedged Equity Index, a broad benchmark of German stocks
without euro currency risk. The index looks to consist of
dividend-paying companies that are incorporated in Germany and
trade primarily on German Exchanges (read
The Comprehensive Guide to German ETF
Stocks included will need to have a market cap of at least $1
billion, pay at least five million dollars annually in dividends,
and see daily dollar trading volume of at least $100,000 a day.
From a sector perspective, investors should note that the maximum
weight of any one segment is capped at 25%, so the portfolio will
not be too concentrated overall.
However, the firms included will also have to derive less than
80% of their revenues from Germany, giving a focus on exporters.
This can potentially tilt the portfolio to companies that are
poised to benefit from a weakened euro in their global
This is because as a domestic currency weakens, it makes
exports cheaper in foreign currencies. Generally, this results in
a boost in purchases by foreigners, helping to add to overall
returns when repatriated back to a domestic currency.
Yet, many times, stock investors from a foreign nation have to
fight through a weakened currency on an equity front, a situation
that is often a headwind to returns. For example, if a U.S.
investor buys German shares in euros, a decline in the value of
the euro against the dollar will have a negative impact on
American-based returns when transferred back to U.S. dollars (see
Do Country ETFs Really Provide
The German hedged equity fund looks to avoid this situation,
seeking to outperform when local currency markets are
unfavorable. However, it is also important to remember that when
the local currency (euro) is firm, hedged products like this
proposed one will probably underperform their unhedged peers.
How might it fit in a portfolio?
This proposed ETF could be an interesting choice for investors
seeking to invest in Germany, but without worrying about the
euro. This could be a welcomed addition to some, as Germany is
often considered to be a strong economy but its equity prices can
be under pressure for U.S. investors thanks to euro weakness.
A hedged fund could also act as a new competitor to the other
currently on the market. At time of writing, there is the
, two small cap funds
, and then an AlphaDEX fund,
as German ETF alternatives.
While they all provide great exposure to the German market-in
various forms-they are also all unhedged as well. So, these
products could outperform when the euro is firm, but they will
probably lag a potential hedged product when the euro is sliding
Are German ETFs in Trouble?
Can it succeed?
Clearly investors have embraced the hedged exposure technique
when it comes to Japan, although there are definitely some
special factors for that market. Easing has reached an incredible
level in that country, and it is hard to imagine the Germans and
the rest of Europe embarking on a similar campaign in
However, it is also worth pointing out that Japan has a
similar economic strategy as Germany, with a lack of commodities
and a heavy focus on exports. This means that the two might be
somewhat similar in many investors' eyes, and that a hedged
currency approach could make sense in Germany as well.
Due to this, a German hedged equity ETF could be an
interesting product, and it may see some decent inflows if it is
ever approved. Further weakness in the euro will probably
be required though, as without more a sluggish currency,
investors will probably stick with the bevy of other ETF options
in the German market for exposure to the important European
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Author is long EWG.
WISDMTR-J HEF (DXJ): ETF Research Reports
ISHARS-GERMANY (EWG): ETF Research Reports
ISHARS-MS GRMSC (EWGS): ETF Research Reports
FT-GERMANY (FGM): ETF Research Reports
MKT-VEC GER SC (GERJ): ETF Research Reports
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