Small-Cap ‘DXJ’ Version To Go Live Friday

Olly Ludwig
June 26, 2013

DXJ’s ‘mini-me’ goes live this week, but will it be as successful?

WisdomTree, the publicly traded New York-based ETF firm, on Friday is taking the huge success it has had with the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) by launching a small-cap version of DXJ as well as a currency-hedged ETF focused on the U.K.

The WisdomTree Japan Hedged SmallCap Equity Fund (NasdaqGM: DXJS) will track a proprietary dividend-weighted index that measures the performance of small-cap Japanese companies with market values of at least $100 million in market cap listed in Tokyo. Like DXJ, the small-cap fund will take the yen-dollar cross out of the return profile.

Similarly, the WisdomTree United Kingdom Hedged Equity Fund (NasdaqGM: DXPS) will consist of a portfolio of U.K. equities that neutralizes the impact of fluctuations of the British pound against the U.S. dollar. The U.K. fund will target dividend-paying companies incorporated in the U.K. that derive less than 80 percent of their revenues from home.

Currency-hedging strategies have garnered increasing attention since DXJ began to take off last year. While some economists and strategists are predicting a trend of dollar strength in the coming years, currency-hedged investing hasn’t fully taken off. But if that dollar strength does materialize, funds like the ones WisdomTree is launching would be sensible choices.

DXJ And Its ‘Mini Me’

Last November, WisdomTree tinkered with DXJ’s benchmark to tilt it toward exporters—companies that have done well as the yen has weakened due to stimulus measures that have sought to bring Japan out of its deflationary doldrums.

The now-$9 billion fund—which serves up currency-hedged exposure to Japanese equities—has rallied some 20 percent in the past six months while seeing net inflows of more than $8 billion. The fund’s price has come off highs since markets have turned volatile as much as 50 percent higher earlier this spring.

These companies must derive less than 80 percent of their revenue domestically in order to be included in the mix, according to a regulatory filing detailing the fund. It’s that type of focus on exporters and companies with a global footprint that has helped its broader counterpart, DXJ, do so well.

Small-cap companies are often thought to be more sensitive to domestic growth stories, which could put WisdomTree’s new ETF in a sweet spot at a time when all eyes are on Japan’s aggressive quantitative easing measures designed to lift the country out of a funk of slow growth and deflationary pressures that has lasted for almost 25 years.

The new ETF will also screen for companies that have paid at least $5 million in cash dividends on common shares each year, and that have seen consistent trading volume to the tune of $100,000 average daily dollar volume for three months preceding rebalance, and at least 250,000 shares a month for six months.

Securities are weighted based on annual cash dividends paid, the filing said, with individual stocks capped at 2 percent, and sectors capped at 25 percent.

WisdomTree is also looking to add one other country-focused currency-hedged strategy to its roster, the WisdomTree Korea Hedged Equity Fund, which it put into registration in the spring along with the U.K. fund.


Investors plowed money into currency-hedged equity funds like ‘HEDJ’ and ‘DBEF’ on Wednesday, March 4, while yanking assets out of sundry bond funds, such as ‘HYG.’ Total U.S.-listed ETF assets dropped to $2.084 trillion as a market pullback offset net inflows.

Sizable outflows from various iShares bond funds paced that firm’s outflows on Wednesday, March 4. Total U.S.-listed ETF assets ended the day at $2.084 trillion.


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