Over the past month, the PowerShares DB US Dollar Index Bullish UUP has gained nearly 5 percent, while the Guggenheim CurrencyShares Euro Trust FXE has tumbled by more than 6 percent.
Those performances have been aided by rising expectations that the Federal Reserve will raise interest rates next month, accompanied by views that the European Central Bank (ECB) is preparing to add to its quantitative easing package rolled out earlier this year.
In other words, investors may be looking at another perfect storm for currency-hedged exchange-traded funds that benefit when the euro weakens against the dollar, such as the WisdomTree Inter Hedged Eq Fund HEDJ.
A Closer Look At 2015's Top Asset Gathering ETF
HEDJ, this year's top asset-gathering ETF, has surged more than 8 percent over the past month and has added $587.3 million in new assets during the current quarter.
Still, it has been widely noted that long dollar is a crowded, potentially vulnerable trade heading into the Fed meeting next month.
“The most crowded and vulnerable trade heading into the December Fed meeting is going long on the U.S. dollar, according to Bank of America global fund manager survey results published November 17. The euro has already tumbled 11 percent this year to near parity – about $1.07. And currency volatility has now subsided to the 10-year average, stability that contrasts with a barrage of policy moves that shocked markets earlier in the year: The removal of the Swiss franc’s peg in January and China’s yuan devaluation in August,” reported Bloomberg.
That does not obfuscate the fact that HEDJ has surged 13.2 percent year-to-date compared to a barely noticeable 1.2 percent for the unhedged Vanguard FTSE Europe ETF VGK.
HEDJ's Small-Cap Counterpart: EUSC
In the current environment of diverging developed world central bank monetary policies, investors would do well to not overlook HEDJ's small-cap counterpart, the WisdomTree Europe Hedged SmallCap Equity Fund EUSC.
EUSC debuted in March and is now home to nearly $246 million in assets under management – making it one of the most successful new ETFs to come to market this year. The rookie ETF has had some rough patches, but it is responsive, as it should be, to euro weakness.
An almost 5 percent gain over the past month confirms as much.
EUSC's largest country weight is 21 percent to Italy, one of the largest weights to that country among any ETF that is not an Italy-specific fund. The ETF's nearly 240 components “are weighted in the Index based on annual cash dividends paid with the following caps: maximum individual position capped at 2 percent, maximum sector weight capped at 25 percent, and maximum country weight capped at 25 percent,” according to WisdomTree.
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