WisdomTree Japan Hedged SmallCap Eq ETF’s management team is rated 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 sensible investment philosophy merits an Above Average Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained a significant underweight position in liquidity exposure and an overweight in yield exposure compared with category peers. Low liquidity risk exposure is attributed to stocks with a low trading volume, limiting managers' flexibility. And a high yield exposure is rooted in holding high dividend-paying or buyback stocks. The strategy’s management team earns an Average People Pillar rating. The strategy's parent organization earns the firm a Below Average Parent Pillar rating. People Pillar and Parent Pillar ratings for this strategy are indirectly assigned by a Morningstar analyst rather than algorithmically derived. Please see the notes following each pillar section for more details. The details of assigning methods can be found in each pillar section.

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 SmallCap Eq Fd earns an Above Average Process Pillar rating. 

The largest contributor to the rating is that this fund tracks an index. Historical data, such as 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 bolsters the process. 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. Lastly, the process is limited by the experience of the management team, which averages five years at this fund.

 This strategy skews toward smaller, more value-oriented companies than its average peer in the Japan Stock Morningstar Category. Looking at additional factor exposure, this strategy consistently held some companies with relatively lower trading volume compared with Morningstar Category peers in the last few years. Less-liquid stocks might offer strong returns to compensate for their risks, but they can be harder and more expensive to trade in bear markets. In the latest month, the strategy was also less exposed to the Liquidity factor compared with Morningstar Category peers. This strategy has also displayed a tendency to hold more companies with high dividend or buyback yields than peers over recent years. 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. Compared with category peers, the strategy also had more exposure to the Yield factor in the most recent month. Additionally, the strategy has demonstrated a contrarian approach with relatively low exposure to momentum stocks during these years. Momentum investors tend to expect stocks that have done well recently to continue to do so in the short term. Momentum approaches can entail higher turnover and trading costs since the top stocks can often change. Nevertheless, the fund's Momentum exposure was in line with peers in the latest month. 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 7.9 and 2.6 percentage points, respectively. The sectors with low exposure compared to category peers are communication services and financial services, underweight the average by 3.9 and 3.7 percentage points of assets, respectively. The portfolio is composed of 737 holdings and is less top-heavy than peers. Specifically, 7.4% of the fund’s assets are concentrated within the top 10 fund holdings, as opposed to the typical peer's 24.5%. And finally, in terms of portfolio turnover, this fund trades more frequently than its average peer, potentially racking up additional expenses for investors and creating a drag on performance.

Above Average

Process

WisdomTree’s  team is comparable to peers, resulting in an Average People Pillar rating. There’s a sizable bench of five managers listed on the fund. Together, they manage a total of 111 strategies, with a Silver asset-weighted average Morningstar Medalist Rating, indicating the 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 SmallCap Equity Fund

DXJS tracks a dividend-weighted index of Japanese small-cap stocks. The fund is hedged for currency fluctuations between the USD and JPY.

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Japan's private sector growth ground to a halt in November according to the latest flash PMI data, which is based on about 85%-90% of total PMI survey responses each month. This was mainly attributed to a sharper fall in manufacturing output as service activity expanded at a slightly faster pace in the penultimate month of the year.

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Things were looking tough for the BoJ as recently as this summer, when the country's core CPI bolted north of 4%, far beyond the 2% inflation target that major central banks view as ideal. The Bank of Japan is being reactive to an inflation threat that may very well be in the rearview mirror.

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October's flash PMI data revealed that Japan's private sector economy concluded the eight-month growth streak that commenced in January 2023. This was attributed primarily to a sharper fall in manufacturing production, though services activity growth also slowed to the weakest in the year-to-date.

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The region is likely to see faster disinflation, but prospects for growth in coming years are dimming. Strong consumer spending has supported growth in Asia's three largest economies this year, but there are already signs that the region's recovery may be running out of steam.

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The IMF, the World Bank, and the United Nations all rank China and Japan as the second and third largest economies on the planet. More of what is occurring in the markets should reflect what is happening in China and Japan which are strongly linked economically.

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Japan's private sector economy continued to grow in September, extending the sequence of expansion that commenced at the start of 2023. Slower service sector growth, attributed in part to a renewed decline in new business from abroad, and a quicker fall in manufacturing output underpinned the latest slowdown.

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Japan's stock market has recently been hitting highs not seen since 1990. More rally is in the cards.

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These ETFs have returned and yielded more than the S&P 500 in the first half of 2023 (as of Jun 23, 2023).

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We see the outlook brightening for Japanese stocks vs. developed peers given fewer supply constraints, supportive monetary policy and corporate reforms.

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Despite a slowdown in growth momentum from May, as signalled by the latest June flash PMI data for Japan, a solid quarter of growth is expected for Q2 2023. This may well exceed the strong official GDP reading recorded in Q1, with a service sector expansion primarily supporting growth while manufacturing performance lagged.

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The BoJ has unanimously decided to maintain its ultra-easing monetary policy. It is looking for clearer signs of sustainable inflation growth.

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For investors seeking momentum, Wisdomtree Japan Hedged Smallcap Equity Fund DXJS is probably on radar. The fund just hit a 52-week high, and is up 23.9% from its 52-week low of $41.77 per share.

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News for WisdomTree Japan Hedged SmallCap Equity Fund ETF (DXJS)