HEDJ: Solid Portfolio Without The Currency Risk (NYSEARCA:HEDJ)

International investing is hard. Aside from the fact that it’s been hard to generate outperformance relative to the US for over 15 years now, one has to consider the impact of currency movement throwing off expected returns. If you’re a US-based investor, the weaker international currency is relative to the Dollar, the more that serves as a headwind against performance because of that very conversion hurting your allocation. So why take the currency risk to begin with? Well – you don’t have to. If you’re bullish on Europe but don’t want exposure to the euro, the WisdomTree Europe Hedged Equity Fund ETF (NYSEARCA:HEDJ) is worth considering.

HEDJ is a fund that gives investors access to the performance of a basket of European equities hedged against the currency fluctuations between the euro and the dollar. The fund tracks the performance of the WisdomTree Europe Hedged Equity Index. The idea here is that through the use of a currency-hedging strategy, HEDJ seeks to isolate investors’ returns from the forex market. This can be useful during long periods of extreme euro depreciation against the greenback, helping to maintain the real value of European-currency denominated wealth.

A Look At The Holdings

The appeal of the fund goes beyond the currency hedging side, but also more broadly in terms of it as a diversifier. The top 10 holdings make up 42.48% of the fund, which is fairly concentrated but also not unusual for international funds regardless of whether they are currency-hedged or not.

What are these companies? Stellantis NV is a multinational automotive corporation, formed by the merger of Fiat Chrysler Automobiles and the Peugeot S.A. (PSA) Group, and is one of the largest automakers in the world. Banco Bilbao Vizcaya Argentaria SA is a banking group based in Madrid, Spain. ASML Holding NV is a Dutch company that produces complex semiconductor equipment such as lithography systems used in the manufacture of integrated circuits. And Siemens is a German multinational engineering and electronics conglomerate corporation with activities in over 200 countries.

Nice mix here overall. The stocks in the portfolio give this a nice value tilt, with a dividend yield of 3.33%, and P/E of 10.40.

Sector Composition and Weightings

When we look at the sector allocation, Consumer Discretionary makes up the biggest allocation at 23.47%, followed by Industrials at 19.66% and Financials at 14.66%. It’s rare to see Consumer Discretionary at the top of a fund allocation list. While I worry about the state of the consumer in the US, the international side I think is interesting as Europe begins its interest rate cutting cycle.

As to country allocation, the Netherlands has the largest exposure here at 27%, followed by Germany and France. Overall fairly well-balanced in my view.

Peer Comparison

One fund worth comparing this against which also has currency hedges is the iShares Currency Hedged MSCI Eurozone ETF (HEZU). This fund invests solely in companies in the Eurozone region, while the HEDJ gives broader exposure to European equities, including companies outside of the Eurozone. When we look at the price ratio of the two, we find that there’s no clear edge in choosing one over the other, given the performance has been roughly the same since 2020.

Pros and Cons

The biggest positive here is that the WisdomTree Europe Hedged Equity ETF isolates investors’ returns to exchange rate movements between the euro and dollar, thus potentially enhancing risk-adjusted return. The fund allows for passive investment in the broad European equity market, which is made up of well-diversified, dividend-paying companies operating across different sectors in Europe.

The downside? If Europe actually appreciates relative to the dollar, you might want to actually unhedge your international exposure, as that would be a positive to total return. Hard to imagine given how strong the US economy has been relative to Europe, but still worth considering. In addition, the fund likely will also be affected by geopolitical and economic developments in the European region. This could have an adverse effect on the performance of the fund’s underlying companies.

Conclusion

Solid fund overall. It does what it’s supposed to do, taking our currency movement, and the mix of holdings adds some nice diversification overall to a portfolio. I think it’s worth considering if, like me, you believe it’s only a matter of time before international investing shows some real momentum, and you want to take out the euro in your allocation.

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