WisdomTree Japan Hedged Equity ETF’s management team is just average, but a solid investment process still helps this strategy retain its Morningstar Medalist Rating of Bronze. The portfolio maintains a sizable cost advantage over competitors, priced within the second-cheapest fee quintile among peers.  

 The strategy's effective investment philosophy supports an Above Average Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained a significant overweight position in yield exposure and an underweight in volatility exposure compared with category peers. High yield exposure is attributed to holding high dividend-paying or buyback stocks, and is suitable for income seekers outside of fixed-income. And low volatility exposure is rooted in stocks that have a lower standard deviation of returns. The equity team managing the passive strategy earns the strategy an Average People Pillar rating. The strategy's parent organization still has a way to go to reach the industry standard, evidenced by a lack of inside investments from portfolio managers and a cohort of unseasoned portfolio managers. As a result, the firm obtains a Below Average Parent Pillar rating.

Analyst Rating

Morningstar's evaluation of this security's process aims to determine the likelihood that it will outperform its Morningstar Category benchmark on a risk-adjusted basis over the long term. WisdomTree Japan Hedged Equity Fund earns an Above Average Process Pillar rating. 

The most notable contributor to the rating is that this fund tracks an index. Historical data, like Morningstar's Active/Passive Barometer, finds that passively managed funds have generally outperformed their active counterparts, especially over longer time horizons. Strong risk-adjusted performance also supports the rating. This can be seen in the fund's five-year alpha calculated relative to the category index, which suggests that the managers have shown skill in their allocation of risk. 

 This strategy skews toward larger, more value-oriented companies compared with its average peer in the Japan Stock Morningstar Category. Analyzing additional factors, this strategy has continually displayed high-yield exposure compared with Morningstar Category peers during recent years, holding more companies returning cash to shareholders via dividends or buybacks. High-yield stocks tend to be connected to more mature companies earning enough cash to return some to shareholders. At times, however, extreme market pressure can force them to cut their dividends, which hurts stock performance. In recent months, the strategy was more exposed to the Yield factor compared with its Morningstar Category peers as well. The managers have also shown an underweight risk tilt, demonstrated by lower volatility exposure over peers in recent years. These low-risk stocks are typically at their best when markets are not. Low volatility exposure contributes to limited loss on the downside at the cost of a lag in bull markets. Similarly, in recent months, the strategy also had less exposure to the Volatility factor than peers. In addition, this strategy has not maintained a defensive tilt, demonstrated by low exposure to the quality factor. This means the fund avoids holding firms that are consistently profitable, growing, and have solid balance sheets.  Lacking this ballast, the fund's prospects will rest on its ability to supersede peers during economic booms. In this month, however, the strategy had more exposure to the Quality factor than its peers. More information on a fund and its respective category's factor exposure can be found in the Factor Profile module within the Portfolio section. 

 The portfolio is overweight in basic materials and industrials relative to the category average by 3.7 and 3.1 percentage points, respectively. The sectors with low exposure compared to category peers are technology and communication services, underweight the average by 4.1 and 3.2 percentage points of assets, respectively. The portfolio is positioned across 434 holdings and is quite concentrated. Specifically, 30.6% of the portfolio's assets are housed within the top 10 holdings, versus the category’s 24.8% average. And in closing, in terms of portfolio turnover, this portfolio's holdings turn over more often than comparable products in its peer group, possibly resulting in higher costs for investors and a drag on performance.

Above Average

Process

WisdomTree’s equity team is valuable but does not stand out as one of the industry's best, warranting an Average People Pillar rating. There’s a sizable bench of five managers listed on the fund.  Together, they manage a total of 115 strategies, with a Bronze asset-weighted average Morningstar Medalist Rating, demonstrating their potential to deliver positive alpha relative to the category median in aggregate.  

 Note: This People Pillar rating is indirectly assigned by an analyst. Morningstar analysts evaluate the People Pillar for passive products at the brand level and may also differentiate by asset class. There is at least one other passive strategy at the firm that is covered by a Morningstar analyst, so the People Pillar rating of the fund is inherited from the rating that the Morningstar analyst assigned to investment vehicles under the same brand name.

Average

People

WisdomTree is an exchange-traded fund provider whose proprietary indexes underpin many of its funds. After the firm's core lineup of fundamentally weighted funds lost its luster in a difficult value environment, WisdomTree faces an identity crisis.

WisdomTree has plugged the holes in its value-oriented lineup with trendy thematic funds. Offerings that aim to capitalize on hot topics like cloud computing and genetic advancement fall outside the firm's realm of expertise and look like Band-Aids to curb outflows, not well-vetted long-term investments. Predictably, this point-and-shoot product-development approach had led WisdomTree to shut down funds at a lofty rate.

Bucking an industrywide, investor-friendly trend, WisdomTree has modestly trimmed fees on just a handful of funds. Such stubbornness calls into question whether the publicly traded firm prioritizes fundholders' or shareholders' interests. Recent inflows have helped, but severe outflows over the late 2010s have weakened the firm's financial position over the past several years.

The firm's research organization remains a highlight. Despite scattershot product launches, the team has demonstrated the ability to also hatch economically sound ideas and develop them into practicable products, like its funds that mechanically exclude state-owned enterprises. 

WisdomTree's commitment to investor education is another plus. Its Advisor Solutions platform, launched in 2016, provides advisors with a wealth of resources, and recent partnerships with Onramp Invest and Gemini should help advisors navigate cryptocurrency complexity. WisdomTree can read its clients' needs, but its trendy fund lineup shows that it's too willing to cater to their wants. It retains its Below Average rating.

Below Average

Parent

WisdomTree Japan Hedged Equity Fund

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