Hawkish rhetoric from Janet Yellen plus hints of fresh stimulus from Mario Draghi are making for a winning combination.
That scenario at the beginning of the year sent record amount of cash into the WisdomTree Europe Hedged Equity Fund, catapulting it to the No. 1 spot for 2015 ETF inflows in the U.S. And now it’s playing out again, only this time around, investors burned by the stronger euro and summer selloff are making their wagers more cautiously — via the derivatives market — while the pace of inflows to the exchange-traded fund slows.
Open interest on HEDJ calls, or bullish options, has jumped 66 percent since the European Central Bank president signaled the possibility for more easing measures on Oct. 22 — underpinned by Federal Reserve comments and positive economic data that drove up odds that U.S. rates will rise next month.
“As fund flows into the product have waned, investors may be looking to the options as an alternative to gain exposure,” said Christopher Jacobson, a New York-based options strategist at Susquehanna Financial Group LLLP.
HEDJ tumbled 22 percent from a high in April through September, and options activity signals that while investors are creeping back into the central-bank policy divergence trade, they are doing so with caution after the short-euro trade backfired in August and European equities almost entered a bear market. The ETF rose 0.6 percent at 10:13 a.m. in New York.
The number of HEDJ calls traded in a single day reached a record 62,123 on Nov. 13, data compiled by Bloomberg show. At the same time, volume and the number of puts, or bearish options, have stayed flat.
While money flows into HEDJ have resumed after a September lull, they’re lackluster versus the start of the year. The ETF has lured $970 million since Oct. 22, data compiled by Bloomberg show. That compares with the weekly average of $800 million the fund attracted in the first four months of the year.
“Many investors likely gravitated towards HEDJ in order to hedge against strength in the dollar as it outperformed other currencies,” Jacobson said. “As that outperformance flattened more recently, investors have likely been less focused on hedging the currency aspect.”
The most crowded and vulnerable trade heading into the December Fed meeting is going long on the U.S. dollar, according to Bank of America global fund manager survey results published Nov. 17. The euro has already tumbled 11 percent this year to near parity -- about $1.07. And currency volatility has now subsided to the 10-year average, stability that contrasts with a barrage of policy moves that shocked markets earlier in the year: the removal of the Swiss franc’s peg in January and China’s yuan devaluation in August.
HEDJ has also still outperformed the next biggest European stocks ETF listed in the U.S., rising 10 percent this year compared with the Vanguard FTSE Europe fund’s 2.3 percent decline through Wednesday.
“The huge inflow into HEDJ and sudden interest in the product has caused a liquid options market to spring up,” said Pravit Chintawongvanich, a New York-based derivatives strategist at Macro Risk Advisors. As for the smaller inflows, he said, “people have probably bought enough HEDJ for now.”
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