WisdomTree Investments (NASDAQ:WETF), the industry's fifth largest ETF provider, has been stuffing up its product pipeline with hedged products. Already a reputable issuer with rich experience in rolling out successful currency hedged products, WisdomTree was quick to spot new opportunities latent in the international arena.
Presently, WisdomTree dominates the space with Japan Hedged Equity Fund (DXJ) and Europe Hedged Equity Fund (NYSE:HEDJ) having AUM of $13.5 billion and $10.6 billion, respectively. Other issuers like Deutsche and iShares are far lagging the WisdomTree funds. However, the loose money market policies have now encouraged WisdomTree to file for a new hedged ETF targeting the small-cap European space (read: Four Reasons to Buy WisdomTree ETFs).
Newly Filed Product in Focus The passively managed fund looks to provide exposure to small companies across the Europe by tracking the performance of the WisdomTree Europe Hedged SmallCap Equity Index. The Index has a tilt toward dividends and rules out the weakness in euro against the greenback. To do so, the concerned index takes into account the dividend paying companies in the bottom 10% of the total market cap of the Wisdom Tree Dividend Index of Europe, Far East Asia and Australasia. Selected stocks trade in euros and are domiciled in a European country.
The utmost weight of any single security is sealed at 2% whereas the ceiling for the maximum weight of any one sector and any one country remains at 25%. The fund looks to charge 58 bps in fees. How Does It Fit in the Portfolio? The newly launched ETF can be a good choice for investors seeking exposure to the small cap companies within the Europe while avoiding current risks. For the U.S. investors, a descending euro affects total returns, when repatriating to dollars. Following the recent QE launch in the Euro zone and negative interest rates prevailing in several economies, Euro has weakened to multi-year lows versus the US dollar. For this reason, investors wanted to consider a hedged euro play while intending to stay exposed in the likely recovery of Europe (read: Forget Europe's Currency Risks with These Hedged ETFs).
This is especially true given that small cap companies are closely tied to the European economy and generate the majority of their revenues from the domestic market. Moreover, they pick up faster than their larger counterparts in a growing economy. Also, focus on dividends will benefit investors as the region is presently seeing an ultra-low interest rate environment. So monetary easing and currency weakness should support European consumption and may in turn boost small cap stocks. This clearly explains why Wisdom Tree’s recent filing is well -timed (read: Watch These Europe ETFs If the ECB Prints Money).
ETF Competition The newly launched fund is likely to face competition from other WisdomTree products such as Europe Small Cap Dividend ETF (NYSE:DFE), iShares MSCI Europe Small-Cap ETF (NASDAQ:IEUS) and SPDR EURO STOXX Small Cap ETF (SMEZ) (read: Play Europe with these Small Cap ETFs). Among the trio, DFE emerged as a popular player as it has amassed as much as $734.5 million in assets and tracks the WisdomTree Europe SmallCap Dividend Index, a fundamentally weighted index that measures the performance of the small-capitalization segment of the European dividend-paying market. DFE also charges 58 bps in fees. WisdomTree’s prior success in similar-themed products should translate into recognition for the recently filed ETF, if approved. Plus, the new product has a hedged treatment unlike others, calling for additional gains in the current environment.