A Look at the Performance Behind Our Suite of Dynamically Hedged ETFs

Key Takeaways

At WisdomTree, we offer numerous suites of Funds. In this blog post, I will focus on two particular suites: one that is dynamically hedged and another that is not hedged.

The only difference between the Funds in each pair is the dynamic currency hedge, allowing for an easy evaluation of the net impact of currency hedging.

Dynamic currency hedging has reduced international portfolio risk while adding value on non-hedged equity portfolios.

Since 2016, DDWM has added 2% annually over DWM, as it benefited from adapting its hedge during a stronger dollar period for much of the last few years.

Because the U.S. dollar has been strong, it has been difficult to beat a 100% hedged portfolio. However, dynamically hedged DDWM, with a performance of 8.3% and risk of 12.7% since 2016, has been able to beat a 50% hedged portfolio.

The current dynamic hedging strategy has five components, with a broad market currency trend indicator accounting for 50% of the weight and the other four components (carry, cross asset, low vol and momentum) equal weighted across the remaining 50%.

Since 2023, every component has added some value, with carry and low volatility signals adding the most. 

Figure 1: DDWM and DWM Performance vs. Different Hypothetical Hedging

Sources: WisdomTree, FactSet, Refinitiv 1/31/16–5/31/24. Past performance is not indicative of future results. Investment return and principal
value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost.
Current performance may be lower or higher than the performance data quoted. For the most recent month-end and standardized
performance and to download the respective Fund prospectuses, click the relevant ticker: DDWM, DWM.

In July, we rebalanced both our developed and emerging markets currency models. Specifically, the hedge for the developed market decreased to about 20%. This change was primarily influenced by the two momentum components of the strategy: the broad trend and cross-sectional momentum, which together account for 62.5% of the weight. As previously mentioned, the increased momentum weight in the new developed market strategy since 2023 has led to more frequent adjustments in hedge ratios.

Figure 2: Historical Dynamic Hedge Ratio in Developed Market

Sources: WisdomTree, FactSet, Refinitiv 1/06/16-7/10/24. Past performance is not indicative of future results.

In July, the currency strategy for the WisdomTree Emerging Markets Multifactor Fund (EMMF) remains similar to June. We are closely monitoring whether the strategy’s signal regarding the potential weakening of the dollar is limited to developed markets.

Figure 3: Historical Dynamic Hedge Ratio in Emerging Markets

Sources: WisdomTree, FactSet, Refinitiv 8/9/18–7/10/24. Past performance is not indicative of future results.

In summary, we maintain our belief that a factor-based dynamic currency strategy can mitigate volatility in international portfolios while potentially enhancing long-term performance.