(Bloomberg) -- The dollar rally is proving a boon for an exchange-traded fund provider backed by former hedge-fund manager Michael Steinhardt.
WisdomTree Investments has gained 33 % this year, driven by the success of two exchange-traded funds that let investors buy European and Japanese stocks while avoiding the decline in the currencies. The company’s European fund has attracted $7.4 billion in 2015, the most of any U.S. ETF, and the Japan fund has won $2.2 billion, according to data compiled by Bloomberg.
“WisdomTree has caught lightning in a bottle,” Matt Hougan, president of ETF.com, a San Francisco-based research firm, said in a telephone interview.
Founded in 1985 by the current chief executive officer, Jonathan Steinberg, WisdomTree has grown into the largest publicly traded money manager focused exclusively on ETFs. The firm, a pioneer in fundamentally weighted and active ETFs, has benefited as its currency-hedged funds proved popular with U.S. investors hoping to take advantage of aggressive monetary policies in Europe and Japan, which sent stocks soaring and currencies plunging against the dollar.
The Stoxx Europe 600 Index gained 16 % this year in local currency; the Nikkei-225 Stock Average climbed 8.8 %.
The euro is trading near a 12-year low and has lost 12 % against the U.S. dollar this year. The yen fell 1.3 % in 2015 and 30 % since Prime Minister Shinzo Abe took office in December 2012 pledging to revive the economy.
When New York-based WisdomTree designed the two ETFs, the aim was not to make a prediction about the yen or the euro. Instead, it was to give investors a way to buy global stocks without worrying about currency fluctuations.
“People have no idea where the currencies are going so why take the risk,” Jeremy Schwartz, WisdomTree’s director of research, said in a telephone interview.
In 2012, the firm tweaked both ETFs, the WisdomTree Japan Hedged Equity Fund and the WisdomTree Europe Hedged Fund, to emphasize exporters most likely to benefit from a weakened currency.
The assets of the Japan fund grew 10-fold in 2013 according to data compiled by Bloomberg, as the yen slumped against the dollar. The European fund grew about 14-fold in the past 12 months and more than doubled assets in 2015.
“Having some of the leading products in the industry creates a kind of halo effect for WisdomTree,” Macrae Sykes, an analyst with Gabelli & Co., said in a telephone interview. Sykes has a buy recommendation on the stock.
In 2004 the company signed up Jeremy Siegel, professor of finance at the University of Pennsylvania’s Wharton School, as senior investment strategy adviser, and raised money from investors including Steinhardt, whose hedge fund Steinhardt Management produced returns averaging 24 % a year for 28 years until it was wound down in 1995. Steinhardt is the firm’s chairman and the largest shareholder, with an 11 % stake, according to data compiled by Bloomberg.
WisdomTree created its Japan fund when it entered the ETF business in 2006. It changed the fund in 2010 to neutralize the impact of currency swings, after Schwartz noticed that the Japanese currency and stock market often moved in opposite directions. The European fund was started at the end of 2009. Combined, the two ETFs have about $30 billion, more than half of WisdomTree’s $52 billion in assets, according to the firm’s website.
Their success has attracted competition from larger money managers. Deutsche Bank AG in 2011 started the Deutsche x- trackers MSCI EAFE Hedged Equity ETF, which attracted $3.5 billion this year, second-most among U.S. ETFs. BlackRock, the world’s largest money manager, a year ago took aim at WisdomTree with a similar fund, the iShares Currency Hedged MSCI EAFE ETF. That fund has grown to $1.65 billion.
Bloomberg, the parent of Bloomberg News, creates indexes and licenses their use for a fee to companies including WisdomTree.
Chris Konstantinos, director of international portfolio management at Riverfront Investment Group, a Richmond, Virginia- based firm that oversees $5 billion, owns stakes in both WisdomTree ETFs.
“They have worked out well,” Konstantinos said in an interview.
Over the past two years, the WisdomTree Japan fund has returned more than twice as much as the iShares MSCI Japan ETF, which buys Japanese stocks without adjusting for the currency, according to data compiled by Bloomberg.
In the last six months, the WisdomTree Europe fund gained 18 %, compared with a decline of 5.3 % for the traditional iShares Europe ETF.
ETFs invest in baskets of securities and trade on exchanges like stocks. U.S. ETFs had assets of $2.1 trillion at the end of February, data from BlackRock show.
While Konstantinos isn’t ready to sell either ETF, he has tempered his expectations for gains going forward.
“Given how far the currencies have fallen against the dollar, the hedged trade is less compelling,” he said.
When the yen strengthened against the dollar in the first half of 2014, investors withdrew money from WisdomTree Japan Hedged Equity Fund, according to data compiled by Bloomberg.
“There will be some lumpiness in the flows,” said Sykes.
At WisdomTree, Schwartz is convinced that the hedged ETFs are more than just a hot trade.
“These can be long-term allocations for investors,” he said. “They can be more than a call on the dollar.”