It was just a few years ago, 2013 and 2014 to be precise, that currency hedged exchange traded funds were all the rage. These days, not so much. Since 2015, ETFs designed to benefit from dollar strength against foreign currencies have beset by $45 billion in outflows.
With the Invesco DB US Dollar Index Bullish Fund (NYSE: UUP) up 5.23% year to date, a strong case can be made that investors looking to nibble at foreign stocks should consider currency hedged funds.
For investors mulling developed markets exposure with a currency, the WisdomTree International Hedged Quality Dividend Growth Fund (NYSE: IHDG) merits consideration and price action confirms as much. After hitting a record high on Wednesday, IHDG is higher by almost 26% year to date, beating the unhedged MSCI EAFE Index by 950 basis points while displaying the same level of volatility.
Why It's Important
The $508.39 million IHDG tracks the WisdomTree International Hedged Quality Dividend Growth Index. Components in that index are weighted using a combination of growth and quality factors.
“The growth factor ranking is based on long-term earnings growth expectations, while the quality factor ranking is based on three year historical averages for return on equity and return on assets,” according to WisdomTree. “Companies are weighted in the Index based on annual cash dividends paid.”
What's important about IHDG dividend purview is that it's growth, not yield. The fund's dividend yield of 1.54% implies an ample runway for payout growth. On that note, IHDG allocates 19.59% of its weight to Japan, a country that only recently has scratched the surface of what could long-running dividend growth.
Past returns are never guarantees of future performance, but IHDG dispels the notion that investors are best-served with unhedged funds over the long-term. Over the past three years, the WisdomTree has beaten the MSCI EAFE Index by nearly 1,400 basis points with roughly the same level of volatility. Since coming to market, IHDG has beaten the developed markets benchmark by a margin of better than 3-to-1.
Along the currency hedged and quality traits, another reason IHDG has proven to be the better than the MSCI EAFE Index is stock selection. Overlap by weight between that ETF and index is just 17%, according to ETF Research Center data.