Tag Archives: seeking-alpha

Wisdom Tree Small-Cap Global ETF: Currency-Hedged Version

Since the importance of currency hedging international investing is known to all, thanks to the soaring greenback against a basket of currencies, WisdomTree could not hold itself back from rolling out a currency-hedged global small-cap ETF, a few days after launching the WisdomTree Global SmallCap Dividend ETF (BATS: GSD ). The newly launched fund is named WisdomTree Global Hedged SmallCap Dividend Fund and trades under the ticker symbol HGSD . In any case, WisdomTree is almost at the helm of the currency-hedged ETF investing style. And this strategy would be extremely meaningful next year, as the Fed looks to hike key rates by the end of this year and most developed nations (even some emerging markets) are following the easy money policy to boost their economies (read: ” Can Anyone Match WisdomTree in Currency-Hedged ETFs? “). Below, we highlight the key characteristics and the prospects of HGSD. HGSD in Focus HGSD looks to deliver the investment results of the 1,000 largest small-capitalization companies that fall in the bottom 5% of the WisdomTree Global Dividend Index. It simultaneously follows a currency-hedging exposure, which is a beneficial strategy to minimize the adverse fluctuations between the U.S. dollar and foreign currencies. The fund charges 43 bps in fees. Sector-wise, Financials dominates the fund with 26.43% allocation, closely followed by Industrials (20.1%), Consumer Discretionary (15.34%) and Materials (9.21%). Geographically, the U.S. takes about 49.24% of the total basket, with Japan taking the second spot, holding about 10.69%. The other regions account for single-digit holdings each. How Could it Fit in a Portfolio? The wave of easy money polices across the globe, be it in Europe or Asia, have brightened the appeal for dividend investing lately. Though the Fed is preparing for policy normalization in December, the modest U.S. growth momentum indicates a slower rate hike trajectory in the future. All these market forces should keep bond yields in check globally. As a result, investors looking for steady current income might shift their focus to high-dividend stocks. Moreover, all these market forces set the stage for global investing, but it in a currency-hedged manner to neutralize the dollar strength. The newly launched ETF’s heavy exposure in the U.S. and Japan will enable it to ride on steady economic growth. Though the Japanese economy has slipped into a recession, its central bank is pursuing an ultra-easy monetary policy which should act as a driver for investors. Other underlying nations, including the UK, Canada and Australia, have also chosen the accommodative policy route to boost their own economies. This will lead to stepped-up activities and rising business and consumer confidence, which, in turn, will benefit small-cap companies. After all, small caps are considered the measure of the domestic economy. In a growing economy, these pint-sized securities perform the best, as they generate most of their revenues from the domestic market and strip out global growth concerns. Competition Players in the global small-cap, currency-hedged ETFs are not many. Hardly two or three products are available now. So, HGSD will face stiff competition from the iShares Currency Hedged MSCI EAFE Small-Cap ETF (NYSEARCA: HSCZ ) and the WisdomTree International Hedged SmallCap Dividend ETF (NYSEARCA: HDLS ). However, WisdomTree’s other fund, HDLS, does not consider stocks outside the U.S. and Canada. So, HGSD should not face any hurdle in amassing investors’ assets. Original Post

Do Covered Call ETFs Deserve A Look?

Covered Call ETFs (or Buy-Write ETFs as they’re known to some) are an intriguing option for investors looking to generate a little extra portfolio income. But you have to have some sense of where the market is heading in order to really profit from them. Covered Call ETFs are generally known for their high yields. One of the largest covered call ETFs – the PowerShares S&P 500 BuyWrite Portfolio (NYSEARCA: PBP ) – sports a trailing 12 month dividend yield of just over 4%. That number is actually low in the covered call ETF universe as smaller funds like the Recon Capital NASDAQ 100 Covered Call ETF (NASDAQ: QYLD ) offer yields in the 8-9% range. Here’s how they work. In a typical equity ETF the fund’s managers buy individual stocks and hold them within the portfolio. In a covered call ETF, managers take the same stock positions but simultaneously write call options on those positions (thus the name “buy-write”). The goal is to benefit from the equity position while at the same time generating an income on the side. While the yields are nice, the overall performance of the buy-write ETF really depends on the direction of the market. In up markets, buy-write ETFs tend to underperform as the written calls start getting exercised limiting an individual stock’s upside potential. Conversely, these funds tend to outperform in sideways or down markets as many of the written calls expire worthless leaving the fund to simply collect the option premiums. The PowerShares S&P 500 BuyWrite Portfolio has historically performed about as would be expected. It outperformed the S&P 500 during the time right after the financial crisis as stock prices were dropping and subsequently lagged the index for much of the last four years. However, the fund has returned roughly 5% year-to-date outpacing the S&P 500’s return of almost 2%. If global economic weakness would be expected to continue, covered call ETFs could begin outperforming again.

Investing Opportunities As Central Banks Diverge

Stocks rallied last week as investors looked past the tragic attacks in Paris and once again focused on central bank policy. In particular, investors celebrated the potential for more central bank divergence: tightening by the Federal Reserve (Fed), while the European Central Bank (ECB) pursues easing. In the U.S., investors now appear to be treating a December Fed rate hike as a sign of economic stability rather than as something to be feared. As such, investors were cheered last week by the October Fed meeting minutes , which implied that the central bank views the economy as strong enough to justify an initial rate hike, most likely in December. Meanwhile, European stocks continued to rally on hopes of more monetary stimulus, rather than signs of economic recovery. Investors got what they were looking for last week, with several ECB officials confirming the likelihood that the central bank will expand its quantitative easing (QE) program. As I wrote in my latest weekly commentary ” Cheering, Not Fearing, a Rate Hike? “, as these central banks diverge, there are several implications for investor positioning. Consider overweighting hedged European equities. A falling euro and an ECB likely to expand its monetary stimulus are both catalysts for Europ ean stocks . The one caveat: Given that further gains are partly predicated on a weaker currency, dollar-based investors should continue to consider currency-hedged vehicles . In the U.S., consider adopting a modest tilt toward large- and mega-cap stocks. At first blush, my preference for U.S. large-cap stocks seems counterintuitive, given expectations for a stronger dollar. Generally, a strong dollar is seen as more of a headwind for large caps, which have a greater exposure to international sales. However, this year has demonstrated how the relationship is more complex. Yes, a stronger dollar has proved a headwind for large-cap company earnings, but small caps have actually been underperforming, according to Bloomberg data. Part of the reason has to do with why the dollar is appreciating: rising real (after-inflation) interest rates. As data accessible via Bloomberg show, U.S. real 10-year rates are up roughly 60 basis points (0.6 percent) since the end of January. This, in turn, is having an impact on small-cap valuations, based on Bloomberg data. Through October, S&P 500 Index multiples actually rose a bit. However, the price-to-earnings ratio on the Russell 2000 Index of small-cap stocks contracted by around 2.5 percent. It should be noted that this is consistent with history. Looking forward, to the extent we see a gradual rise in real rates, higher real rates are likely to keep small-cap valuations under pressure. Finally, according to Bloomberg data, large- and mega-cap names also have the advantage of cheaper valuations relative to the broader market. This post originally appeared on the BlackRock Blog.