What Does ETF Innovator See As Next Big Emerging-Market Trend?

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When WisdomTree Investments ( WETF ) launched its first exchange traded funds 11 years ago, they came onto the market with a big splash.

[ibd-display-video id=2386749 width=50 float=left autostart=true] For starters, the company's 20-fund launch was the biggest by a single issuer in the New York Stock Exchange's 200-year history. Its six domestic and 14 international funds offered investors a dividend-weighted approach as an alternative to traditional capitalization-weighted index funds. And the company's currency-hedged ETFs gave investors a way to manage currency risk.

Its currency-hedged funds continue to attract interest. Two of the biggest ETFs in the space are WisdomTree Europe Hedged Equity Fund ( HEDJ ) and WisdomTree Japan Hedged Equity Fund ( DXJ ), with respective assets of $9.2 billion and $8.3 billion as of Oct. 11.

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The ETF provider continues to roll out timely offerings, including one geared for rising rates, a smart-beta fund with multifactor exposure, and a fund that provides currency-hedged access to international dividend payers (see below for the ETF names).

New York-based WisdomTree is the world's 10th-biggest ETF provider, with about $47 billion in assets under management and more than 80 offerings. IBD touched base with Luciano Siracusano, WisdomTree's chief investment strategist, to find out his thoughts on the active-passive debate,  the next big ETF trend, and the U.S. and global stock markets.

Siracusano has served as chief investment strategist since 2008. Before that he was director of research until 2001. He's also the co-creator, along with WisdomTree CEO Jonathan Steinberg, of the company's patented indexing methodology.

The full interview with Siracusano follows:

IBD: How much has WisdomTree grown since launching its first ETFs in 2006?

Siracusano: In 2006, WisdomTree launched the company's first 20 ETFs in one day. Today, we offer 87 ETFs in the U.S., and our assets under management have grown to more than $45 billion globally. We've expanded throughout the world, with offices in the U.S., Europe, Japan and Canada, as well as distribution partnerships in Latin America, Israel and Australia.

IBD: What sets your ETFs apart from the competition?

Siracusano: WisdomTree is unique in that we were among the first ETF providers to launch funds based on our own proprietary stock indexes. Creating both ETFs and the underlying indexes allows us to develop innovative investment alternatives to traditional market-cap-weighted index funds. Over the past decade, that entrepreneurial spirit has helped to create a culture of excellence at WisdomTree that, when combined with the track record of many of our funds, has helped to distinguish us from many of our peers.

IBD: WisdomTree is known as an innovator, from its fundamentally weighted ETFs to its currency-hedged ETFs. Why do you think smart beta, which includes fundamentally weighted ETFs, is now uber-popular?

Siracusano: For some of the same reasons that smartphones and flat-panel TVs are so popular. Competition leads to innovation, and innovation can lead to products that better serve consumers. Investment managers and investors alike are always looking for better ways to invest. WisdomTree believes our smart-beta ETFs can help investors by either enhancing overall returns, providing more dividend income potential, providing unique exposures, or reducing volatility relative to traditional capitalization-weighted index funds or actively managed mutual funds.

IBD: What do you think will be the next biggest trend among ETF providers?

Siracusano: WisdomTree pioneered weighting equity markets by their dividend streams, launching international small-cap ETFs and currency-hedging international equity portfolios. Now that the dollar has weakened this year, I would expect "dynamic hedging" of foreign currency exposure to garner greater attention. Another emerging trend is investor preference for the stocks of emerging-market companies that are not owned in large measure by the governments in those regions. For example, in 2017 two WisdomTree emerging-market funds that exclude state-owned enterprises - the WisdomTree China ex-State-Owned Enterprises Fund ( CXSE ) and the WisdomTree Emerging Markets ex-State-Owned Enterprises Fund ( XSOE ) - have posted attractive returns relative to comparable capitalization-weighted benchmarks that make no such distinctions.

IBD: What's next for WisdomTree?

Siracusano: The financial industry is undergoing rapid change, and technology is disrupting the way advisors do business. As a result, WisdomTree has been focusing on advisor solutions, such as model portfolios, portfolio construction services, and technology-enabled platforms to help advisors grow their business in light of these challenges.

IBD: What are your most popular ETFs/strategies in terms of assets and inflows this year - and why do you think that's the case?

Siracusano: WisdomTree's top three ETFs in terms of gathering assets year-to-date have been the WisdomTree U.S. Quality Dividend Growth (DGRW), the WisdomTree U.S. MidCap Dividend Fund (DON) and the WisdomTree International SmallCap Dividend Fund (DLS). This is likely a result of the strong U.S. equity markets this year, but also investors recognizing the investment opportunity overseas.

IBD: Why are emerging markets doing so well - and can they continue to rally?

Siracusano: WisdomTree believes emerging markets represent some of the most compelling opportunities for returns over the next several years despite strong flows and performance year-to-date. Part of the reason is the historically low returns generated by the asset class over the past 10 years. If you believe in reversion to the mean, subpar trailing returns are a positive when evaluating an asset class as a whole. As a result, many emerging equity markets remain attractively valued.

Now that an earnings recovery is underway and there has been a pickup in overall inflows into the region, you are starting to see the stocks move again.  The currencies have also strengthened considerably over the past 18 months relative to the U.S. dollar, as expectations for rising rates in the U.S. have moderated. This has helped to increase returns for U.S. investors invested in EM stocks and EM bonds issued in local currency.

IBD: Your outlook for the U.S. and global stock markets in the next three to six months?

Siracusano: If we see tax cuts this year or in early 2018, we are likely to see a resumption of the "Trump Trade" - rising yields on the 10-year Treasury, a stronger dollar, a rotation back into U.S. small-cap and midcap stocks, and relative strengthening of Japanese stocks. If the proposed tax cuts don't get passed, I would not be surprised to see yields head back toward 2.0% on the 10-year, and a resumption of investor interest in unhedged international and emerging-market equity.

IBD: Are there certain types of ETFs investors should focus on in a rising-interest-rate environment?

Siracusano: If rates rise because both the Fed and investors have confidence economic activity will remain strong, then I would look to the kinds of ETFs that did well, for example, in the second half of 2016 when interest rates rose in the U.S. Two WisdomTree ETFs that did well in that environment were the WisdomTree Interest Rate Hedged High Yield Bond Fund (HYZD), which hedges our interest-rate duration, and the WisdomTree Japan Hedged Equity Fund ( DXJ ), which gives investors exposure to Japanese stocks while mitigating fluctuations in the yen. Japanese stocks have been extraordinarily sensitive to rising U.S. interest rates and a stronger U.S. dollar.

IBD'S TAKE: Looking for exchange traded ideas but not sure where to start? Check out the weekly ETF Leaders column and accompanying ETF Leaders list for some highly rated funds.

IBD: As an active ETF pioneer, what's your take on the long-standing active vs. passive debate?

Siracusano: WisdomTree developed actively managed fixed-income funds with indexes that some could characterize as "rules-based active." Today, you can create strategies that are subsets of the markets - so-called factor exposures - through index-based approaches. As a result, we feel you can find better value for "beta" or "factor" exposure through index-based approaches than through active management. Going forward, I think the real debate will be passive vs. passive, or beta vs. smart beta, and how to combine both to get the best outcome for investors. That creates a big opportunity for ETF managers and for mutual fund managers that use ETFs to add value for clients through deft asset allocation.

IBD: Has WisdomTree felt pressure to lower expense ratios, due to increased competition?

Siracusano: We feel we're well-positioned from a pricing standpoint as our firm offers a differentiated and innovative product set and generally positive track records net of fees. Ultimately, we firmly believe the way to compete with a low-fee ETF that tracks a cap-weighted index is to create a better underlying index.

IBD: How many ETFs has WisdomTree closed and launched in the past year or so - and what is the total number of offerings currently?

Siracusano: We chose to close several funds in 2017. At the same time, we are focused on developing new and innovative products to meet investor demand. We launched the WisdomTree Dynamic Currency Hedged International Quality Dividend Growth Fund (DHDG) in November 2016, the WisdomTree Barclays Yield Enhanced U.S. Short-Term Aggregate Bond Fund (SHAG) in May 2017, as well as the WisdomTree U.S. Multifactor Fund (USMF) in June 2017.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Stocks
Referenced Symbols: WETF , HEDJ , DXJ , CXSE , XSOE

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