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.