How Dynamic Currency Hedged ETFs Work

February 03, 2017

Luciano Siracusano is WisdomTree’s chief investment strategist. He is the co-creator, with CEO Jonathan Steinberg, of WisdomTree’s patented indexing methodology. Siracusano led WisdomTree’s sales organization from October 2008 until June 2015, while also serving as the firm’s chief investment strategist. caught up with him at Inside ETFs to discuss the dynamic hedged ETFs that were launched last year. Last year at this time, WisdomTree had just launched its dynamic hedged products. Would you talk a little bit about that?

Luciano Siracusano: The one that we put the most focus on is the one that's done the best. That's the WisdomTree Dynamic Currency Hedged International Equity Fund (DDWM), which is the broadest one, and that goes up against the EAFE [Europe, Australasia and Far East] products [such as the iShares MSCI EAFE ETF (EFA)], but dynamically hedges out the currency every month. That's up to $340 million in assets.

So it's definitely had a good, quick uptake. The nice thing about it is that the performance in 2016 was really terrific. It beat both EFA and 100% hedged EAFE [such as the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (DBEF)]. We were 70-80% hedged most of the year.

Chart courtesy of And what was the key to that; the flexibility in the hedge?

Siracusano: It was the combination of getting the right calls on the major currencies. I think we were nearly totally hedged out on sterling before it collapsed. And we were hedged out on the euro for most of the year—83% or so. How is that determined?

Siracusano: It's determined each month based on three signals. One of them is the interest-rate differential between the foreign currency and the U.S. The second one is momentum. It's really a technical signal based on short-term movements in the price momentum. And the third one is a longer-term signal based on valuation. It's a measure of the purchasing power parity between the foreign currency and the U.S.

Those three signals together, over time, in our research, all added value as a signal. And when you combine them together, you have the potential, we think, to squeeze out about a percentage point a year of return from the lion's share of the dollar-up move or protecting when the dollar's declining.


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