U.S. investors tend to have a home bias when it comes to investing, which may lead to missed opportunities internationally. Todd Rosenbluth, head of research at VettaFi, discussed these international opportunities heading into the fourth quarter with Jeff Weniger, head of equity strategy at WisdomTree, in the recent Q4 Equity Symposium hosted on the VettaFi platform.
The U.S. comprises a significant portion of the MSCI All-World Index — 64.42% as of 8/30/24, according to MSCI. As the single largest country allocation within the index, international investors must contend with this bias when investing overseas.
Compound the weighting bias with the perception bias built on over a decade of U.S. outperformance, and it may leave many investors with an underweight to international assets. Given the strong equity bull run in the U.S. in the first half, this portfolio underweight to international may be even more pronounced. It creates the potential for missed opportunities arising from the changing tides happening in global markets.
“We have a regime shift in relative interest rates, relative economic fundamentals, and valuations on the equity side,” Weniger explained. Notably, there is a relative valuation gap between the U.S. and the eurozone, Japan, and even China for those investors willing to take on a contrarian position.
International Investing: Hedged Currency Strategies
WisdomTree has long believed in the value of hedging currencies when investing overseas. Currency hedging reduces or protects against exchange rate changes on an international investment’s returns. It’s a strategy that continues to prove popular. The WisdomTree Europe Hedged Equity Fund (HEDJ ) currently holds over $1.6 billion in AUM, and the WisdomTree Japan Hedged Equity Fund (DXJ ) amassed over $3.5 billion in AUM since its inception in 2006.
Where hedged currency strategies shine is in their ability to potentially mitigate currency exchange volatility. Weniger used the euro over the last decade as an example. While stable on paper, it still rose and fell frequently by a nickel or more between settlements. For nonhedged investors, it created additional volatility to contend with, which made hedged funds like HEDJ more attractive.
DXJ remains a significant outperformer among targeted Japan ETFs. The fund experienced strong drawdowns at the beginning of August on the rapid unwind of the yen carry trade. “It’s now snapped back and recuperated many of those losses,” noted Weinger. The market response to the BoJ’s 0.25% interest rate increase does not reflect the country’s outlook.
“All of the key catalysts for perpetuating a bull market in Japan continue,” Weniger explained. “They are all in on the corporate governance reforms … return on equity in that country looks set to rise into 2025 and 2026.”
Weniger also noted the proposed acquisition of 7-Eleven, a Japanese-owned company, by a foreign buyer as a notable one. It would mark the largest acquisition by a foreign entity to date as well. It would also be a significant departure from Japan’s previous stance regarding foreign ownership of Japanese companies.
Investors seeking broad capture of developed countries while using currency hedging would do well to consider the WisdomTree International Hedged Quality Dividend Growth Fund (IHDG ). While international investing often holds a reputation for added volatility, IHDG mitigates a portion of that through its currency hedge.
Weniger elaborated: “The claim to fame of IHDG, which is over 10 years old now … it’s currency hedged and has the volatility metrics that are shaping up oftentimes lower than most of the U.S. line items in your portfolio.”
'Value Overseas Is Not Nearly the Same Story'
Emerging markets remain challenged this year, particularly given the added drag of China. However, value investing and a fund like the WisdomTree Emerging Markets High Dividend Fund (DEM ) may provide opportunity.
Weniger explained that DEM offers deep value exposure, with traditional value exposures to sectors like materials, financials, and energy. The fund’s screen for high dividends also currently minimizes Chinese tech exposures.“Value overseas is not nearly the same story — value is doing just fine,” he added. “In fact, in developed markets, value started beating growth four years ago, and no one really realizes it.”
Another fund for those seeking targeted country exposure includes the WisdomTree India Earnings Fund (EPI ), which is based on earnings and not market cap.
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