An ETF With Currency Hedged Compensation

There has recently been considerable chatter that the Federal Reserve will push off raising interest rates until next year, in turn decimating the long dollar trade. One obvious result of dollar retrenchment, if it arrives in earnest, would be punishment for currency hedged exchange traded funds.

That is the mainstream point of view, but other market observers believe the dollar still has room to run. Additionally, the theme of developed markets dividend-paying stocks sporting higher yields than their U.S. equivalents is alive and well, highlighting the potential benefits of an ETF like the WisdomTree International Hedged Dividend Growth Fund IHDG.

IHDG tracks the WisdomTree International Hedged Dividend Growth Index (WTIDGH), a benchmark that when explained simply, can be interpreted as a dividend growth answer to widely followed EAFE indexes. Neither IHDG's currency hedge nor its dividend growth emphasis should imply the ETF is immune from downturns in international markets.

IHDG's underlying index “takes a different approach, not focusing on the highest-yielding dividend payers, but more importantly seeking to neutralize the currency exposure. This way the experience of index returns is dictated by the dividend focus and quality selection, as opposed to being further impacted by any movements in currency,” according to a note out from WisdomTree Research Director Jeremy Schwartz. 

The ETF's 12.8 percent 90-day decline is inline with that of the MSCI EAFE Index. However, the unhedged MSCI EAFE Index is down 3.4 percent year-to-date while IHDG is up 1.3 percent.

IHDG offers exposure to 21 countries and although this is a developed markets ETF, the fund is not a heavy play on the falling euro as Eurozone nations combine for just 28.5 percent of the ETF's weight. What investors are getting at the country level with IHDG is access to the UK, the largest ex-U.S. developed markets dividend payer, to the tune of 20.2 percent.

Additionally, IHDG levers to investors to the theme of growing Japanese dividends. Previously stingy but cash-rich Japanese companies are boosting dividends and buybacks at a rapid pace by that country's historically lethargic standards for shareholder rewards. Switzerland, perhaps the steadiest dividend growth market in continental Europe, is IHDG's third-largest country. Combined, the UK, Japan and Switzerland are 43.7 percent of the ETF's weight.

“While WisdomTree believes its dividend growth methodology provides an important long-run strategy that can complement the benefits of a value– or yield-focused selection methodology, over this period, currency was the dominant factor impacting returns,” adds Schwartz.

IHDG, which is just 15 months old, has a distribution yield. It is just an anecdote, but critics recently assailing the slowing inflows to currency hedged ETFs apparently are not paying attention to IHDG. The ETF has $530.3 million in assets under management, of which $203.3 million has arrived in the current quarter.