WisdomTree Investments, the provider of exchange-traded funds, is Exhibit A of how a hit product can be both a blessing and a curse.
The popularity of the firm's Europe Hedged Equity Fund exploded in 2014 and 2015 as investors sought exposure to European stocks without the downside risk of a weakening euro. As Bloomberg's Camila Russo reported on Tuesday, the fund's market value swelled to more than $22 billion this summer, only to dip to $17 billion by the end of the year as European Central Bank stimulus failed to live up to expectations, halting a slide in the euro right when it appeared once again to be making a beeline toward parity with the dollar.
The growth in the ETF, along with the popularity of a similar fund that invests in Japanese stocks while hedging the yen, have come to dominate WisdomTree's business. International hedged equity strategies made up about $35 billion of the company's $53 billion in U.S.-listed ETFs at the end of the third quarter. Look at how the correlation between the hedged-euro ETF, known by its ticker HEDJ, and WisdomTree shares has increased:
The recent decline in correlation highlights the fact that losses in the ETF, which uses currency derivatives to hedge against a weaker euro, is wreaking even more havoc on WisdomTree's share price. The stock was up as much 66 percent year-to-date at its last record on Aug. 3, and up a whopping 4,640 percent since the bull market started in 2009. The stock has plunged 38 percent from its last record, almost double the drop in the HEDJ fund from its peak and more than twice the drop in the Japan-hedged ETF known as DXJ.
It may be tempting to conclude that WisdomTree has had its run as a one-hit (or two-hit) wonder in the ETF world. And that may well be true. But with U.S. gross domestic product and inflation still forecast to outpace Japan's and the euro zone's for the foreseeable future, it's not unrealistic to guess that central bank stimulus may revive the conditions that caused the ETFs to become so popular in the first place.
Mario Draghi may have disappointed euro bears earlier this month, spurring a one-day gain of 3 percent in the currency's exchange rate versus the dollar, but he is still the "whatever it takes" guy.
And after perusing WisdomTree's list of offerings, you have to wonder whether some of its other ETFs may yet have their day in the sun after a year when simply buying traditional index products didn't work out so well, and in most cases neither did paying high fees to a hedge fund.
Both the HEDJ and DXJ funds had some lean years before the right financial conditions caused their market values to swell. While less likely, a weaker dollar could lead to inflows into a WisdomTree ETF that benefits if the U.S. currency declines. Two new offerings -- the WisdomTree Dynamic Long/Short U.S. Equity Fund and WisdomTree Dynamic Bearish U.S. Equity Fund -- could entice investors should the U.S. bull market start looking even more exhausted.
Plenty of competitors exist for many of these funds, to be sure, but WisdomTree stands out after scoring hits with the HEDJ and DXJ funds. And while analysts have lowered the company's profit projections, the long-term earnings-per-share growth estimate of 29 percent is among the highest of 61 large investment-management firms tracked by Bloomberg Intelligence. Meanwhile, its PEG ratio -- its forward P/E divided by its earnings growth rate -- is on the low side at 0.76.
Throw in the fact that the company could be an attractive bolt-on for a struggling asset-management firm, and it doesn't appear out of the question that WisdomTree could bloom again.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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