Geographic ETFs and Their Underlying Indexes – HEDJ, DBEU

Certain countries at certain time point can achieve momentum performance thanks to some macro-level policy stimulus and geopolitical climate, investors embrace such ETFs as a handy weapon for them to wield, capitalizing on their judgments.

WisdomTree Europe Hedged Equity Fund, HEDJ, developed and launched by WisdomTree in December 2009, has since attracted $9.82 billion AuM. What’s more, the annual return in the last 5 years is 10%.

Its underlying index is WisdomTree Europe Hedged Equity Index, belongs to a holistic family of WisdomTree Hedged equity indexes, all adopting modified capitalization weighting scheme, aiming to define the respective dividend-paying segments of Europe, United Kingdom, Germany, Japan etc. segment of the stock market. They are reconstituted in every June each year, to reflect its dividend weighting in its respective index, or in Korea’s case, to reflect its earnings-weighting schema. The index series also designed a hedge strategy against currency fluctuations in the relative value of the U.S. dollar.

universe eligibility standards are quite aligned with conventional rules, except that for international scope, both market capitalization and liquidity metric, measured by average daily trading volume are near one tenth of those of U.S. universe, I. e. at least $100 million market capitalization and an average daily dollar volume of at least $100, 000 for three months preceding the Screening Date.

WisdomTree also applies a Foreign Investment Screen to exclude companies that are not available to be purchased or transacted in by foreign investors (or certain segments of foreign investors) or cannot continue to be reasonably purchased or transacted in by foreign investors (or certain segments of foreign investors), which, they set a data point “Degree of Open Freedom” (DOF), a variable that ranges from zero to one and indicates the amount of the security foreigners may legally own (0.00 indicates that none of the stock is legally available, 1.00 indicates that 100% of the shares are available). Any company with a DOF of zero will not be eligible for the WisdomTree Indexes.

Starting from the April month end, all WisdomTree Currency-Hedged Indices will be calculated using forward amounts and foreign currency weights determined one business day prior to the month end. The precise calculation of the daily-hedged currency index equals. The indexes are calculated wherever the NYSE is open for trading. If trading is suspended while the exchange the component company trades on is still open, the last traded price for that stock is used for all subsequent index computations until trading resumes.  The initial weight of a component in the Index at the annual reconstitution is derived by multiplying the U.S. dollar value of the company’s annual dividend per share by the number of common shares outstanding for that company.

Another distinctive feature offered by WisdomTree in its geographic hedged index family is its “smart beta” application of “the Cash Dividend Factor” based weighting. The Cash Dividend Factor is calculated for every component in the Index and then summed. Each component’s weight, at the Weighting Date, is equal to its Cash Dividend Factor divided by the sum of all Cash Dividend Factors for all the components in that Index. The Weighting Date is when component weights are set, it occurs immediately after the close of trading on the second Friday of June. New Component weights take effect before the opening of trading on the first Monday following the third Friday of June.

For the Europe Hedged Equity Index, the following capping rules apply in the following order: the maximum weight of any individual security in the Europe Hedged Equity Index is capped at 5% on the annual rebalance prior to the introduction of the country and sector caps. The weights may fluctuate above the specified caps during the year but will be reset at each annual rebalance date. Should any country achieve a weight equal to or greater than 25% of the indexes, the weight of companies will be proportionally reduced to 25% as of the annual Screening Date. Should any sector achieve a weight equal to or greater than 25% of the Indexes, the weight of companies will be proportionally reduced to 25% as of the annual Screening Date.

DBEU, Deutsche X-trackers MSCI Europe Hedged Equity ETF, was launched in 2013 and has since amassed an AuM of $2.35 billion. The fund tracks MSCI Europe US Dollar Index, a market-cap-weighted and currency-hedged index of companies in developed Europe. It falls under MSCI global currency index family containing the Daily hedged indexes, FX hedge indexes, Global Currency Indexes. Similar to HEDJ and HEDJ’s underlying index WisdomTree Europe Hedged Equity Index, DBEU and the MSCI Europe US Dollar Index, is also engaging in currency forward contracts to hedge out its currency exposure.

Now take a look at their historical performances.

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