Adaptive vs Dynamic: Comparison of two new currency hedged Japan ETF

Probably the majority of investors would agree that currencies are the most difficult markets to forecast. This year, the movement of Japanese Yen and Euro against US dollar good examples of currencies unpredicatability. Although Japan and Euro Zone are in the negative interest rate territory, US is going to increase interest rate, Yen appreciated 13.0%,  Euro appreciated 4.4%, against USD respectively. They are out of the majority’s predition.

JYP & EUR

At the beginning of 2016, currency hedged ETFs evolved into a new stage. Almost at the same time, iShares and WisdomTree launched their new currency hedged ETFs, and the ideas are very similar. On Jan. 5 2016, iShares launched 3 “Adaptive” currency hedged ETFs: DEFA (iShares Adaptive Currency Hedged MSCI EAFE), DEZU (iShares Adaptive Currency Hedged MSCI Eurozone), DEWJ (iShares Adaptive Currency Hedged MSCI Japan). On Jan. 7 2016, WisdomTree launched 4 “Dynamic” currency hedged ETFs: DDWM (WisdomTree Dynamic Currency Hedged International Equity), DDLS (WisdomTree Dynamic Currency Hedged International SmallCap Equity), DDEZ (WisdomTree Dynamic Currency Hedged Europe Equity), DDJP (WisdomTree Dynamic Currency Hedged Japan Equity).

By comparing DEWJ and DDJP, we can know more about how these new currency hedge strategies work.

DEWJ vs DDJP

From the table above, we can find that two funds are quite similar in almost all aspects. The major difference is the hedge ratio options: DEWJ has only 5 fixed options, while DDJP can be anywhere from 0 to 100%. Currently, DEWJ hedged 75% of its underlying assets, while DDJP hedged slightly above 50%. Due to the strong appreciation of Japanese Yen in June, both funds forward contracts (short Yen long USD) lose money.

Another notable point is that both funds are very small by net assets. In the iShares Japan fund series, EWJ is giant with net assets 14.7 billion, HEWJ (the fully hedged version of EWJ) has a net assets of 610 million, DEWJ (the adaptive hedged version of EWJ) has only 3.3 million. In the WisdomTree family, DXJ (fully hedged) has 7 billion, while DDJP has only 4.5 million. In the long run, if these adaptive/dynamic strategies really work, these funds will gain popularity.

 

 

 

 

 

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