A Europe ETF That Endured The Yuan Devaluation...Sort Of

It has been almost a month since the People’s Bank of China (PBoC) devalued the yuan. Over that period, the WisdomTree Dreyfus Chinese Yuan Fd (ETF) CYB has slid 4.2 percent, but plenty of other international exchange-traded funds have been affected by the Chinese currency's slide.

The China Influence

The yuan's slide has been a drag on Europe ETFs, too. China is a major destination for European luxury exports ranging from automobiles to clothing to handbags, so it is plausible that ETFs chock full of European companies that depend on China as a significant revenue source would be pinched in the aftermath of the yuan devaluation.

Some Europe ETFs have been less bad than others in the wake of the Chinese currency's devaluation, though investors might be surprised to learn that includes some small-cap funds.

Related Link: An ETF That Gains As China Loses

A Closer Look At DFE

For example, the WisdomTree Europe SmallCap Div Fd (ETF) DFE has recently offered modest outperformance of CYB, the yuan ETF. DFE tracks the WisdomTree Europe SmallCap Dividend Index.

“The WisdomTree Europe SmallCap Dividend Index delivered a 0.72 percent positive return. European equities were broadly negative during this period, but this Index also includes exposure to European currencies, which appreciated against the U.S. dollar over the period. The four largest exposures are to the euro (+1.29 percent), British pound (+0.97 percent), Norwegian krone (+0.56 percent) and Swedish krona (+3.04 percent),” said WisdomTree in a recent note.

Sure, that is just a one-week period being cited by WisdomTree, but what is notable about DFE and what could help insulate the ETF to some extent from further PBoC yuan chicanery is the ETF's small dependence on China as a revenue driver for the fund's member firms. WisdomTree estimates that as of July 31, 2.6 percent of the WisdomTree Europe SmallCap Dividend Index's weighted average dollar revenue came from China. That is significantly less than the percentages on some marquee Europe large-cap ETFs.

DFE Advantages

Rather, the companies found in DFE depend on Europe for about two-thirds of revenue. DFE is not currency hedged, nor is it a dedicated eurozone ETF, but the fund has some advantages.

For example, DFE is conservatively positioned at the country level with British, Swedish and German stocks combining for half of the ETF's weight.

Second, DFE's underlying index sports a dividend yield of 3.8 percent, more than double the trailing 12-month dividend yield on the Russell 2000 Index. However, DFE's index has a slightly lower price-to-earnings and price-to-book ratio than the Russell 2000, according to WisdomTree data.

“European completion, namely by taking small caps into consideration, one can diversify the markets where companies receive revenue. Large caps tend to be more sensitive to the global economy and could face pressure if there are continued worries about an Asian currency war breaking out, while small caps are one way to position for an improving European economy,” added WisdomTree.