Six new smart beta ETFs are now trading on the TSX.
They’re the fruit of prospectuses filed in April by New York-based WisdomTree. In June, Mackenzie Investments launched two smart beta ETFs after entering the ETF space in April 2016, while Sphere Investments debuted in April 2016 with a promise to launch 30 smart beta funds. TD has also promised to launch a suite of ETFs this year.
With more than 400 ETFs jockeying for investor attention, is the market saturated? Raj Lala, head of WisdomTree Canada, doesn’t think so. “If you subscribe to the ten-to-one rule of the U.S. versus Canada, there’s still a lot of inherent growth just to catch up.” He says American smart beta is worth $400 billion, while it’s only $10 billion here – a 40:1 ratio.
Advisor.ca’s Investor Insights study found that in the last three years, smart beta use has become less prominent for 54% of respondents, and more prominent for 45%. The percentages were flipped for index funds in general: less prominent for 45% of respondents, and more prominent for 54%.
Lala points out his firm is bringing dynamic currency hedging here for the first time. “Currency has been a challenge for a lot of Canadians,” he says. “In many cases, it’s had a deteriorating effect on returns.”
But how to meet that challenge isn’t clear. Lala asked three brokers last week about their hedging strategies, “and I got three answers: ‘I’m fully hedged,’ ‘I’ve been completely unhedged and […] I’ve missed the boat,’ and ‘I’m hedged in some cases but not others.’”
Dynamic currency hedging uses a rules-based approach to determine when to hedge and by how much. In the case of WisdomTree, its approach looks the status of three equally weighted signals: interest rates, momentum and value. Hedging ratios are updated monthly, in 16% increments (from 0% to 100% hedged).
“I don’t know anyone who has a consistent record of making currency calls correctly,” says Mark Yamada, president and CEO of PUR Investing. “Currency risk, traditionally, is on the list of all risks considered when investing internationally. To neutralize that risk can be useful unless the investor has a view about a currency.”
He adds the ongoing cost of a hedge will grind at returns. “Investors need to consider costs at all times,” he says.
The new funds
The new ETFs are:
- WisdomTree Europe Hedged Equity Index ETF (ticker EHE; MER 0.58%)
- WisdomTree U.S. Quality Dividend Growth Index ETF (ticker DGR/DGR.B; MER 0.38% hedged, 0.35% non-hedged)
- WisdomTree International Quality Dividend Growth Index ETF (ticker IQD/IQD.B; MER 58% hedged, 0.48% non-hedged)
- WisdomTree U.S. High Dividend Index ETF (HID/HID.B; MER38% hedged, 0.35% non-hedged)
- WisdomTree U.S. Quality Dividend Growth Dynamic Hedged Index ETF (DQD; MER 43%)
- WisdomTree International Quality Dividend Growth Dynamic Hedged Index ETF (DQI; MER 0.63%)
All ETFs track WisdomTree’s in-house indices.
On July 8, WisdomTree filed prospectuses for five other ETFs, including emerging-markets, mid-cap and small-cap dividend ETFs. Lala says they’ll see how their current ETFs do before launching anything else.
MERs for three of the ETFs are higher than those of WisdomTree’s comparable U.S. versions, while two are the same. HID is slightly cheaper.
“[Our MERs] are right in the wheelhouse of smart beta ETF management fees here, which range from 35 to 60 basis points,” Lala says.
Is smart beta worth paying more for? “When [advisors] are buying pure beta ETFs, if they look at them in isolation, they’re always going to be showing their client underperformance [after fees],” he says. “With smart beta, you have a shot at outperforming your index, which can look well on client statements.”