Structure Matters: Schwartz On DXJ & Hedging

May 06, 2014

Weiskopf: Everybody seems to be talking about Europe. Let’s change the subject for a second, or at least geography. You've got two very successful products: the WisdomTree Europe Hedged Equity (HEDJ | B-43) and WisdomTree Europe SmallCap Dividend (DFE | B-79). Would you speak to how you came to the conclusion to change the methodology on HEDJ, and why those two products have been so successful?

Schwartz: It gets back to that same question as Japan. I believe currency hedging is one of the most important things happening in ETFs today, and HEDJ helps illustrate this.

In this case, we added a 50 percent export tilt to HEDJ (before we added the export screen to DXJ) to change its focus from a broad-based currency-hedged strategy to a fund focused on dividend-paying exporters from the eurozone with the single euro currency hedge.

Those using HEDJ tend to be tactical managers who say, “I want exposure to Europe, but I don’t necessarily have a strong opinion on the euro.” I still think that strategic question for core broad-based international portfolios is actually a really important question.

So, long term, what people need to ask themselves is, Why, as an investor, do I want the euro/yen/pound when I’m buying foreign equities? Traditional indexes start with this baseline, but it doesn’t necessarily have to be the natural conclusion in this new global investment world. The cost to hedge the developed-world currencies is minimal.

Weiskopf: Structure matters as far as when to buy an ETF; especially since the Japanese markets are closed usually when the U.S. markets are open. Are we supposed to look at, from a pricing standpoint, where the futures are? Or do they generally lead off of where it closed?

Schwartz: It’s a great question. There is a lot of confusion on this issue. The Japan stock market opens at 8 p.m. ET, U.S. time, and they close at 2 a.m. ET U.S. time. So when U.S. investors are buying Japanese ETFs, the Japanese markets are closed.

Japan ETFs trading in the U.S. really provide an indication for how Japan’s markets are going to open the next day, based on what’s happening in the yen, what’s happening in Europe, what’s happening in the U.S. markets. They’re taking their cues off of the sentiment.

Often we’ve seen articles about ETFs trading at a 5 percent premium or discount to yesterday’s market close, but this idea is misguided. ETFs serve as price discovery tools in anticipation of the next day’s move.

Weiskopf: When do you think the next catalyst is for Japan?

Schwartz: The short-term catalyst is, When does the Bank of Japan do more quantitative easing? Abe’s chief advisor said the next set of programs could entail more ETF purchases from the Bank of Japan, an area that may have considerable room for expansion.

They have directly stated they’re trying to lower the risk premium to buy in the market, another way the BOJ is signaling support. We also will see more from Abe in his growth strategy this June. So that too can be a catalyst.

Weiskopf: Jeremy, thank you for sharing your insights and research. I look forward to more ETF innovation and reading your research and white papers.


Dan Weiskopf is a portfolio manager of Access ETF Solutions LLC, whose third-party ETF strategies are offered through IPI Wealth Management, Inc. (IPI). IPI is an SEC-registered investment advisor, with its principal office located at 226 W. Eldorado St., Decatur, IL 62522, 217-425-6340. Access ETF Solutions LLC was established in 2013 with a focus that structure matters in selecting ETFs.

References to specific securities or market indexes are not intended as specific investment advice. However, at the time of the release of this interview two of model portfolios separately held positions in the WisdomTree Japan Hedged Equities (DXJ) and WisdomTree Europe hedged Equities ETF (HEDJ). Accounts managed by Access ETF Solutions also may be long WisdomTree (WETF) stock. The manager holds a position in WisdomTree (WETF) stock as well as call options.

In addition, at the time of the release of this interview, two of model portfolios separately held positions in the WisdomTree Japan Hedged Equities (DXJ) and WisdomTree Europe hedged Equities ETF (HEDJ). Separately managed accounts managed by Access ETF Solutions also may be long WisdomTree (WETF) stock. The manager holds a position in WisdomTree (WETF) stock as well as call options. This interview should be viewed as an educational piece and not a recommendation about WisdomTree (WETF) stock.

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