Best & Worst Smart Beta ETFs

August 06, 2015

Japan Top Country

While health care ETFs have been stellar performers in the U.S., the country as a whole hasn't fared too well. In fact, the U.S. stocks are sharply underperforming other regions of the world this year, particularly the top-performing country so far in 2015, Japan.

Four smart-beta ETFs linked to Japan are on the top 10 list, including the Wisdom Tree Japan Hedged Small Cap Equity ETF (DXJS | B-57) and the WisdomTree Japan SmallCap Dividend ETF (DFJ | B-93).

As its name implies, DFJ holds small-caps, while placing a greater emphasis on dividend-paying stocks. DXJS holds essentially the same portfolio but hedges out the currency exposure. So far this year, the currency-hedged DXJS outperformed its sister fund DFJ as the Japanese yen depreciated against the U.S. dollar.

At the same time, both ETFs outperformed standard Japan small-cap funds like the iShares MSCI Japan Small-Cap (SCJ | B-99), which rose by 14.7 through July compared with 20.1 percent for DXJS and 17.6 percent for DFJ.

Another Japan ETF that outperformed on the back of favorable currency movements was the WisdomTree Japan Hedged Equity ETF (DXJ | B-66), an extremely popular fund that holds a basket of dividend-weighted and export-oriented stocks.

DXJ's smart-beta strategy gave it the edge over the also-popular iShares MSCI Japan ETF (EWJ | B-99), with a 17.3 percent gain compared with EWJ's 15.6 percent.

The final Japan fund to make the top-performers list was the iShares MSCI Japan Minimum Volatility ETF (JPMV | B-80), with a 17.1 percent return. The fund, which pulls companies from the same MSCI index as the aforementioned EWJ, adjusts its positions with an eye toward reducing risk by choosing stocks with low volatility and low correlations with each other.

QE Fuels Upside In Europe

Like Japan, Europe has been another strong region for markets in 2015 thanks to the European Central Bank's unprecedented quantitative easing program that began this year. The WisdomTree Europe Hedged Equity ETF (HEDJ | B-48) was one of the best-positioned ETFs to take advantage of that strength, as it returned 17.2 percent through the first seven months of the year.

HEDJ is essentially the Europe version of the popular Japanese fund DXJ, and also focuses on export-oriented firms. Also like DXJ, the fund hedges currency exposure; thus, this year's 9 percent decline in the euro has allowed HEDJ to outperform the cap-weighted behemoth, the iShares MSCI EMU (EZU | A-76), which only rose by 8.4 percent so far this year.

The WisdomTree Europe SmallCap Dividend ETF (DFE | C-86) was another winner, with a 15.9 percent gain. DFE is comparable to the aforementioned DFJ, the dividend-focused Japanese small-cap ETF.

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