ETF Watch: WisdomTree Adds Dynamically Hedged Fund

November 03, 2016

Today WisdomTree is launching another ETF with an adaptive hedge. The WisdomTree Dynamic Currency Hedged International Quality Dividend Growth Fund (DHDG) covers developed markets excluding the U.S. and Canada, and comes with an expense ratio of 0.48%.

The fund is listed on the Bats Global Markets exchange, which also owns ETF.com.

DHDG’s index covers dividend-paying stocks that exhibit both growth and quality characteristics. Individual companies must have paid out $5 million in cash dividends over the prior year, have a market capitalization of $1 billion, an earnings yield that is greater than its dividend yield and meet minimum volume thresholds. The companies in the investment universe are ranked according to long-term earnings growth expectations, historical three-year average return on equity and historical three-year average return on assets, with the top 300 companies selected as index components and weighted based on dividends paid, the prospectus says.

Dynamic Currency Hedge

The dynamic currency hedge is adjusted monthly based on three quantitative criteria: interest rate differentials, momentum and value, according to the prospectus. The fund can be entirely hedged or entirely unhedged. and any increment of hedging in between those two extremes. WisdomTree has teamed up with Record Currency Management on the provision of the signals for adjusting the fund’s hedging.

“[Investors] don’t have to think about whether or not they want to be hedged right now. The strategy, the rules, everything works on the investor’s behalf to give you an institutional-caliber strategy, where essentially you’re assessing real data points that have to do with currency every single month and adjusting the hedges in a way that, over time, the hope is that you are targeting those more profitable hedging opportunities with currency,” said Christopher Gannatti, WisdomTree’s associate director of research.

Gannati also notes that WisdomTree first introduced its quality dividend growth approach in 2013, and has since expanded it to cover a wide range of geographical areas. He describes WisdomTree’s approach as more forward-looking; rather than simply requiring a history of dividend growth, the firm instead focuses on criteria that suggest a company has a higher-than-average likelihood of raising its dividend in the future. Such a strategy also tends to screen out certain types of stocks.

“You end up with this natural avoidance of financials, and in particular. banks,” Gannatti said, noting it was in part due to the firms’ higher levels of leverage.

WisdomTree launched a handful of ETFs with dynamic hedges at the beginning of 2016, but only one of those has gathered significant assets. The WisdomTree Dynamic Currency Hedged International Equity Fund (DDWM) has nearly $287 million in assets under management and an expense ratio of 0.35%.

Meanwhile, the unhedged WisdomTree International Quality Dividend Growth Fund (IQDG) has just $2.4 million in assets and comes with an expense ratio of 0.38%. The fully hedged WisdomTree International Hedged Quality Dividend Growth Fund (IHDG) charges 0.58% and has AUM of nearly $506 million.

 

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