This article series aims at evaluating ETFs regarding past performance and quality of their current portfolios. As holdings and their weights change over time, reviews may be updated when necessary.

Fast facts and strategies

WisdomTree International Hedged Quality Dividend Growth Fund (NYSEARCA:IHDG) has been tracking the WisdomTree International Hedged Quality Dividend Growth Index since 07/05/2014. As of writing, it holds a portfolio of 264 stocks, plus 76 short positions in foreign currencies, so as to offset the currency risk on stock holdings. The fund has a 12-month distribution yield of 4.09% and a total expense ratio of 0.58%. Distributions are paid quarterly. It is respectable regarding size and liquidity, with $1.31B in assets under management (“AUM”) and an average daily volume of 220K shares.

As described by WisdomTree, the underlying index “is comprised of the top 300 companies from the WisdomTree International Equity Index with the best combined rank 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. Companies are weighted in the Index based on annual cash dividends paid“.

The index also aims at “neutralizing exposure to fluctuations between the value of foreign currencies and the US dollar“.

A misleading name

After reading this, it becomes clear that it is not a dividend-growth fund in the commonly accepted sense. It is a fund holding stocks of dividend-paying companies with expected earnings growth, but not growing dividends. It certainly holds some dividend growing stocks, but it is not among the selection criteria. This strategy is similar to the underlying index of WisdomTree Global ex-US Quality Dividend Growth Fund (DNL), which I reviewed here in January. Both funds have misleading designations for investors who do not read their descriptions carefully. If you are looking for growing dividends, they are not for you. It doesn’t mean these funds are bad. In fact, selecting dividend stocks with quality and growth characteristics makes a lot of sense.

Do you really want this hedge?

The currency hedge adds some complexity to the fund’s price behavior, so I will try to make things as simple as possible. If you think the US dollar will stay strong or become stronger relative to the British Pound, the Swiss Franc and the Euro (the main currencies in the portfolio), then you want this hedge. Remember what I wrote in the first paragraph: IHDG has short positions in local currencies of the companies in the portfolio. It means it is long USD against these currencies. The idea of ​​the hedge is that if Swiss holdings gain +10% in CHF, this portion of the fund gains +10% in USD, whatever the Swiss Franc does.

However, currency risk has two edges (without an “h”). If you have a doubt about the strength of the dollar, or if you seek diversification with plain exposure to foreign economies, then you’d better choose a non-hedged fund.

There is another level of complexity and risks related to currencies, not covered by the fund’s currency hedge. A stronger dollar may be beneficial to a foreign company’s sales because their products and services become cheaper in USD, and it may also be detrimental when providers or creditors must be paid in USD.

Portfolio composition

IHDG is mostly invested in large and mega-cap companies (81% of asset value) and in Europe (about 80%). The two heaviest countries in the portfolio are the UK and Switzerland, with the same weight (17.3%), followed by France (14.4%). Other countries are below 9%. The next chart plots the countries weighing more than 1%, for an aggregate weight of 97.5%. Hong Kong weighs 3.4%, so direct exposure to geopolitical and regulatory risks related to China is low.

The fund is well-diversified across a number of industries. The top three sectors, consumer discretionary, consumer staples and healthcare, are between 18% and 21%. Industrials and technology follow between 12% and 15%. Other sectors are below 5% individually and 16% in aggregate.

The top 10 holdings, listed below, represent 37% of asset value. The heaviest one weighs about 6%, so risks related to individual stocks are moderate.

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IHDG vs. international hedged ETFs

The next chart compares IHDG total return since inception with two hedged international ETFs: Deutsche X-trackers MSCI EAFE Hedged Equity ETF (DBEF) and iShares Currency Hedged MSCI EAFE ETF (HEFA). IHDG is the best performer, but the difference in annualized return is not very significant (7.6% vs. 7.3%). DBEF and HEFA are based on the same underlying index, which explains why their paths are so close.

However, IHDG has lagged in the last 12 months:

It makes little sense to compare IHDG with non-hedged ETFs (I confess I did it in a previous review). The period since 2014 was characterized by a strong bull market for USD: the dollar index has gained over 30% in 8 years. It is a big bias when comparing hedged and non-hedged funds. I think the dollar is more likely to go sideways or down in the next few years than to continue the same trend.

Takeaway

WisdomTree International Hedged Quality Dividend Growth Fund has a misleading name – it holds dividend stocks with growing earnings, not growing dividends. Although, the strategy makes a lot of sense. It is well diversified across several countries – all are below 18% of asset value. It is also well diversified across several sectors, with a good balance between defensive and cyclical ones (all are below 21%). It has marginally outperformed the currency hedged MSCI EAFE Index since its inception, but has lagged it recently. The currency hedge aims at projecting the performance measured in local currencies into a performance in dollars. It involves a number of embedded currency trades. It is supposed to offset the currency risk for USD-based investors. However, currency risk may be beneficial. Always keep in mind that equity funds with a currency hedge involve two bullish bets: one in a stock strategy and one in a currency, here the USD.