BlackRock's Europe ETF Winning as Traders Dump WisdomTree's

  • Investors have been withdrawing money from HEDJ at record pace
  • HEZU is cheaper option for those who want currency protection

A year ago, investors were buying the WisdomTree Europe Hedged Equity Fund like never before. They’re now dumping it in droves, switching to an exchange-traded fund offered by BlackRock Inc. that’s taking in record money.

While still small, the iShares Currency Hedged MSCI Eurozone ETF saw a 40-fold surge in market value in a year. That included record inflows in December, a month when traders took out $1.8 billion from the WisdomTree fund, the most ever.

The securities are similar in that they track European equities with a currency hedge, a feature that made WisdomTree’s ETF, known by its HEDJ ticker, a favorite among traders wanting in on a stock boom fueled by central-bank stimulus. But after growing by almost $14 billion last year, investors are turning to the cheaper BlackRock option. Mizuho Securities USA Inc.’s Monish Shah picked its $2.4 billion HEZU fund because he sees it as more shielded from turmoil in global stocks as it has a bigger allocation to companies poised to benefit from the domestic recovery.

“Given the current market situation, the difference in index structure and the cheaper expense ratio, HEZU may continue to grow further,” said Shah, head of ETF trading at Mizuho in New York.

Global stocks started the year on the wrong foot, mostly due to renewed worries of a China-led slowdown. While both ETFs have dropped in the past three days, HEZU has lost 6 percent, less than HEDJ’s 6.4 percent slide. On Friday, the iShares security climbed more than the WisdomTree version by 10:26 a.m. in New York.

But strategists are bullish on Europe’s equities, citing the outlook for more stimulus as a catalyst for a 18 percent gain in the Euro Stoxx 50 Index by year end , from Thursday’s close. That may send more investors to HEZU, which has a 13 percent weighting in banks, more than HEDJ’s 7.9 percent -- since European Central Bank President Mario Draghi pledged to save the euro, the region’s lenders have rallied about 20 percentage points more than the broader market.

Also helping fuel the record $757 million in inflows to BlackRock’s fund last month: its cheaper net annual expenses of about 0.5 percent, compared with almost 0.6 percent for the WisdomTree ETF.

BlackRock declined to comment for this story. WisdomTree representative Jessica Zaloom said the company focuses on the long-term prospects for its products, “both in terms of the innovative and differentiated investment solutions they offer investors and the assets they ultimately gather,” she wrote in an e-mail.

Michael Mullaney, chief investment officer at Fiduciary Trust Co. in Boston, chose HEZU over HEDJ because it tracks a hedged version of the wider-known MSCI EMU Index, rather than a gauge designed by WisdomTree.

“We just wanted more pure beta exposure to the European stock market,” Mullaney said. “Plus the WisdomTree product is more expensive, so you put those things together and it was a simpler, cleaner story to use HEZU. Not that HEDJ is bad, but it has more bells and whistles than what we were looking for.”

Mullaney said he invested in HEZU last spring. Now, since he doesn’t expect the euro to weaken further, he’s considering buying more European shares without protecting for currency moves. The non-hedged version of the fund, the iShares MSCI Eurozone ETF, has also been luring investors, with its market cap doubling last year.

Mizuho’s Shah says investors will keep trying to shield against currency fluctuations as rate policies between Europe and the U.S. diverge. Both BlackRock and WisdomTree are starting additional products that take a flexible approach to mitigating dollar strength when buying international stocks.

“The currency-hedged European ETF marketplace will definitely grow further as investors refocus on Europe,” Shah said.

Before it's here, it's on the Bloomberg Terminal.