Market Overview

Getting Dynamic With International Small-Caps

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Getting Dynamic With International Small-Caps

When investing internationally, even in developed markets, investors are taking on some added risk compared to domestic investments. Obviously, part of that is equity risk, but what some investors continue to overlook are the potentially erosive effects of currency risk.

Currency hedged exchange-traded funds have become popular avenues for dealing with that risk, but those ETFs are most effective when the dollar is strong. It can be a burden timing currency markets, just as it can be with bond and equity markets. Enter dynamically hedged ETFs, the new generation of currency hedged ETFs, such as the WisdomTree Dynamic Currency Hedged International SmallCap Equity Fund (BATS: DDLS).

Digging Deep Into DDLS

DDLS is the currency hedged alternative to the successful WisdomTree Intl. SmallCap Div Fd. (ETF) (NYSE: DLS), which was recently highlighted in this space, and the small-cap answer to the WisdomTree Dynamic Currency Hedged International Equity Fund (BATS: DDWM). With over $286.1 million in assets under management, DDWM is one of the most successful new ETFs to come to market this year. 

Related Link: A Pleasant Surprise With This Small-Cap ETF

With more investors recognizing the impact of currency risk on equity returns, DDLS could prove to be a winner over the long term.

What Sets DDLS Apart

“Sometimes currency helps; sometimes currency hurts. It may wash out in the end, but if it adds to your volatility profile, why should U.S. investors assume that currency risk? We started offering the first currency-hedged ETFs in late 2009 and have continued to expand, offering a focus on Europe, Japan and multiple currency baskets from the developed world, including spaces such as international small caps with DLS,” said WisdomTree Research Director Jeremy Schwartz in a recent note.

Like DLS, DDLS is heavily allocated to industrial, consumer discretionary and financial services stocks with those sectors. Japan, the U.K. and Australia combine for over 55 percent of the geographic lineup in DDLS.

DDLS is also a credible player on the dividend front with a distribution yield of 3.14 percent, which is vastly superior to what investors will find on benchmark U.S. small-cap indexes.

“Status quo bias is hard to overcome, and investors have largely kept unhedged exposures—except in cases such as Europe and Japan where they have largely been expressing specific views on the euro and yen. But I encourage investors to rethink their framework and question why they want to bet 'that' a broad basket of foreign currencies in unhedged strategies will forever and always [emphasis omitted] appreciate against the U.S. dollar,” added Schwartz.

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