Currency hedging and Federal Reserve’s announcement – Impact on Wisdom Tree Japan Hedged Equity Fund (NYSEARCA:DXJ)
Shares of Wisdom Tree Japan Hedged Equity Fund (NYSEARCA:DXJ) rose 0.54% to close at $47.98 in its last trading session. Shares remained at the higher end of its 52-week range of $30.24 to $53.95. Market capitalization of the company thus stood at 10.69 billion.
The speculation and rumors about the Federal Reserve narrowing its spending, which is expected to start in September, or later this year, has been good news for U.S. dollar. This is important due to the fact that Japanese ETF’s have seen to benefit when U.S. rates rise. Wisdom Tree research Director Jeremy Schwartz confirmed the possibility of that scenario to play out.
He was reported as saying that on June25, JGB yields were around 0.87%, while 10-year U.S. yields had 2.58%. Also, the interest rate difference may encourage Japanese investors to start buying U.S. treasuries, thereby increasing the pressure on its home currency, the yen. While Japanese equity markets were rallying on one hand, the yen was collapsing on the other as the policymakers made announcements with regard to their decision of quantitative easing. In this backdrop, those ETFs which failed to neutralize currency crosses were declining. It is in this advantage, since DXJ is currency-hedged, that the returns of DXJ were prevented from falling, as the yen fell.
On a macro level perspective, currency hedging would turn out to be profitable, especially for countries which are export oriented. The domestic market tends to get stronger as the currency weakens, as imports become more expensive, and the local goods seem more affordable. Therefore, currency hedging seems to be the only way for some ETFs who have picked up alpha during the past few years. Several ETFs cutting across different sectors earned alpha by reducing their exposure to the biggest companies in their respective sector, rather than favoring companies that are on the lower band of the size spectrum.