The second quarter saw a weak start no doubt in the U.S. weighing on the dollar. But the resilient U.S. dollar resumed its strength over the past couple of weeks thanks to the Fed rate hike bets. In fact, the U.S. Dollar Index rose nearly 4% in the same period, erasing most of the spring losses. The surge in the greenback brought back the appeal for currency hedged ETFs and this trend is likely to continue in the summer months.

This is especially true as a raft of upbeat economic data of late and an accelerating job market indicate that the world's largest economy is improving after the first-quarter slump. If this continues, the Fed might finally increase the interest rates for the first time since 2006, albeit at a slower pace. The first rate hike might be due for September. Given this, monetary policies in the U.S. and the other developed and developing countries are on divergent paths, lending continued strength to the U.S. dollar (read: Currency Hedged ETFs Top Q1 Asset Flows).    

As a result, investors are once again shifting their investment strategy to the currency-hedged funds, which provide pure exposure to foreign markets with zero currency risk. These look to strip out currency risk to a foreign economy by the use of currency forwards or other instruments. Though this space is a bit crowded with a number of issuers, WisdomTree Investments (WETF - Snapshot Report) is leading the way with Europe Hedged Equity Fund (HEDJ) and Japan Hedged Equity Fund (DXJ - ETF report) having AUM of $20.6 billion and $18.3 billion, respectively.

This is because WisdomTree products have drawn investors’ interest to the currency hedged ETF world since their debut, dethroning the major rivals – Deutsche Bank (DB - Analyst Report) and BlackRock (BLK - Analyst Report) – thanks to the first mover advantage, liquidity, price and brand name. In fact, WisdomTree dominates the $51.34 billion space with more than three-fifths share (read: Four Reasons to Buy WisdomTree ETFs).

Is the Dominance Real?

To elaborate its dominance, let’s take a closer look at the top two currency hedged funds and compare them with the rival funds:

Europe Hedged ETFs

These funds have grabbed most of the investors’ interest this year on a massive stimulus program launched by the European Central Bank (ECB). Out of the funds from the three issuers, WisdomTree’s HEDJ dominates the space as it has pulled in over $13.5 billion in capital this year, as per ETF.com. On the other hand, Deutsche X-trackers MSCI Europe Hedged Equity ETF (DBEU) and iShares Currency Hedged MSCI EMU ETF (HEZU - ETF report) see inflows of only $1.7 billion and $1.3 billion, respectively.

HEDJ was launched in December 2009 compared to the October 2013 launch for DBEU and July 2014 debut for HEZU. Additionally, it is highly traded in volumes of nearly 4.9 million shares a day on average, suggesting no extra cost beyond the expense ratio of 0.58%. On the other hand, DBEU trades in average daily volume of nearly 1.1 million shares while HEZU exchanges 605,000 shares in hand (read: Guide to European Hedged ETF).

Though expense ratio is slightly higher, the WisdomTree fund is more efficient that the other two with an efficiency ratio of 0.17 (as per the fidelity.com), suggesting that it has a higher ability to outperform its benchmark.  
 

Japan Hedged ETFs

Similarly, WisdomTree DXJ has gathered about $3.7 billion in AUM versus inflows of $463 million for Deutsche X-trackers MSCI Japan Hedged Equity (DBJP - ETF report) and $369 million for iShares Currency Hedged MSCI Japan ETF (HEWJ - ETF report). DXJ was launched in June 2006 while DBJP and HEWJ are relatively new to the space, having been rolled out in June 2011 and January 2014, respectively.

In terms of liquidity, DXJ sees solid volume of nearly 5.7 million shares per day on average while DBJP and HEWJ trade in average daily volume of nearly 260,000 and 423,000 shares, respectively. Higher trading volume of DXJ compared to the other two products makes it worth playing and ensures no additional cost. Further, the efficiency ratio of DXJ is much higher at +1.72 compared to -2.77 for DBEU and -1.95 for HEWJ (read: WisdomTree Launches Hedged Dividend Growth ETF on Japan).