March was an utterly forgettable month for equities – sentiment that extends to recently resurgent international stocks, too, but the upside of that downside is some buying opportunities were created.
For advisors and investors looking to join the international investing, the WisdomTree Dynamic International Equity Fund (DDWM) is an exchange traded fund (ETF) to consider. The $1.25 billion DDWM, which tracks the WisdomTree Dynamic International Equity Index, can be deployed as an alternative or complement to pure beta developed market exposures.
If history is an accurate guide, advisors may want to view this ETF through the “alternative” lens because over the past decade, it beat the MSCI EAFE Index by more than 900 basis points. In part, that advantage was accrued by way of DDWM’s dynamic currency hedging mechanism, dispelling the notion that investors are better off not fiddling with currency hedging.
Drilling Down on DDWM
For market participants that need a bit more cajoling of recent variety regarding to DDWM, the ETF was recently upgraded to five stars at Morningstar – the research firm’s highest star rating. That’s not an empty platitude. DDWM earned those stripes.
“The strategy's investment process inspires confidence and earns a High Process Pillar rating,” observes Morningstar. “Independent of the rating, analysis of the strategy's portfolio shows it has maintained an overweight in quality exposure and an underweight in volatility exposure compared with category peers. High quality exposure is attributed to stocks with low financial leverage and strong returns on equity. And low volatility exposure is rooted in stocks that have a lower standard deviation of returns.”
For the currency hedging boo birds, of which there are plenty out there, DDWM is proof positive that in the right structure, buffering against foreign currency fluctuations delivers attractive results while potentially reducing volatility. In fact, currency hedging contributes to this ETF’s favorable volatility profile.
“The result has been a consistent pattern since the fund’s inception in 2016,” notes WisdomTree. “Over each calendar year, the dynamic currency hedge applied to DDWM's underlying index consistently reduced volatility from EAFE FX exposures. Oppositely, the unhedged foreign currency experience steadily added volatility to an investor’s international equity allocation.”
DDWM Wins Over the Long-Term
As advisors know, currency fluctuations give and take away. Often times, it’s more of the latter over longer holding periods, confirming the dynamic approach offered by DDWM is validate over the long-term. That’s highlighted in the WisdomTree chart below.
Of course, past performance isn’t a guarantee of future returns, but in the history doesn’t always repeat but often rhymes category, one thing advisors and investors can bank is currency movements eventually being a pain in the neck when investing outside the U.S. DDWM mitigates that problem.
“Since inception in January 2016, the dynamic hedging model produced 14% cumulative returns. This may seem like a small amount spread out over a decade, but it’s more impactful when you realize that the unhedged EAFE foreign currency experience produced cumulative losses over the same period,” concludes WisdomTree. “The Morningstar upgrade to 5 stars reflects not just strong absolute and risk-adjusted returns, but also the effectiveness of this approach across varying market regimes, including periods of significant currency swings.”
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