WisdomTree ETFs INTERNATIONAL HEDGED EQUITY FUND HDWM Approximately 50% of the world s equity opportunity set is outside of the United States, 1 and the majority of that is in developed international stocks, comprising 21 markets. This is a truly dynamic opportunity set from which to draw, and it offers a rich hunting ground of income-generating stocks from which to build an index. Traditionally, venturing outside the United States has involved two investments: + The equities, frequently the focus of interest + The currencies, an additional layer and frequently not as much of a focus as the equities INTERNATIONAL DIVIDENDS: ESTABLISHED RECORD OF PERFORMANCE WisdomTree has been a pioneer in two important categories of indexes and exchange-traded funds (ETFs): international equities and currency-hedged 2 equities. For nine years, the WisdomTree DEFA Index has capitalized on international dividend payers. With the launch of its sister Index, the WisdomTree International Hedged Equity Index, WisdomTree combines our innovative currency-hedging strategy with our existing DEFA Index. To get an understanding of how these Indexes could work, let s first review the performance of the WisdomTree DEFA Index. Our weighting methodology is a key differentiator. And weighting international stocks by their Dividend Streams 3 has led to an impressive live performance track record resulting in: + Greater than 10% Cumulative Outperformance: The WisdomTree DEFA Index has delivered a nearly 40% cumulative return since inception, while the EAFE Index, its comparable cap-weighted benchmark, was around 30%. And the WisdomTree DEFA Index also had a higher Sharpe ratio 4, meaning that it achieved greater returns for the given level of risk. + High Correlation to the Market Cap-Weighted Benchmark: A 0.99 correlation 5 coefficient against the EAFE Index indicates that the WisdomTree DEFA Index s outperformance was achieved without introducing a dramatically different periodic volatility 6 or return experience. 1 Source: Bloomberg. Based on the ACWI Index universe, a broadly recognized global benchmark, as of 6/30/15. 2 Currency hedging: Strategies designed to mitigate the impact of currency performance on investment returns. 3 Dividend Stream : Refers to the regular dividends per share multiplied by the number of shares outstanding. 4 Sharpe ratio: Measure of risk-adjusted return. Higher values indicate greater return per unit of risk, specifically standard deviation, which is viewed as being desirable. 5 Correlation: Statistical measure of how two sets of returns move in relation to each other. Correlation coefficients range from -1 to 1. 6 Volatility: A measure of the dispersion of actual returns around a particular average level.
FIGURE 1: OUTPERFORMANCE & HIGH CORRELATION WisdomTree DEFA Index vs. EAFE Index, (6/1/2006 6/30/2015) From 6/1/2006 to 6/30/2015 Avg. Ann. Return Avg. Ann. Std. Dev. Sharpe Ratio Beta vs. EAFE Index Correlation WisdomTree DEFA Index 1.8% 19.6% 0.05 1.01 0.99 EAFE Index 1.4% 19.4% 0.03 1.00 1.00 90.0% 80.0% Cumulative Returns (%) 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% -40.0% -50.0% WisdomTree DEFA Index EAFE Index 39.8% 30.2% 6/01/2006 6/01/2007 6/01/2008 6/01/2009 6/01/2010 6/01/2011 6/01/2012 6/01/2013 6/01/2014 6/30/2015 Sources: WisdomTree, Zephyr StyleADVISOR, Bloomberg, as of 6/30/15. Standard deviation: A measure of how widely an investment or investment strategy s returns move compared to its average returns for an observed period. Beta: Measure of the volatility of an index or investment relative to a benchmark. Past performance is not indicative of future results. You cannot invest directly in an index. Index performance does not represent actual fund or portfolio performance. A fund or portfolio may differ significantly from the securities included in the index. Index performance assumes reinvestment of dividends but does not reflect any management fees, transaction costs or other expenses that would be incurred by a portfolio or fund, or brokerage commissions on transactions in fund shares. Such fees, expenses and commissions could reduce returns. BROAD EXPOSURE If asked to identify two core principles by which the WisdomTree DEFA Index is guided, we would emphasize broadness of exposure and a relative value rebalance 7. At its most recent Index screening date 8, May 31, 2015, the WisdomTree DEFA Index had 2,441 qualifying constituents a very broad cross-section of international dividend payers, comprising a total market capitalization of $18.6 trillion. It s interesting that this is actually broader than the EAFE Index, which had 911 constituents with a market capitalization of $17.0 trillion as of the same date. 7 Rebalance: An Index is created by applying a certain set of selection and weighting rules at a certain frequency. WisdomTree rebalances, or reapplies its rules-based selection and weighting process, on an annual basis. 8 Annual screening date: The screening date refers to the date upon which characteristics of eligible constituent firms are measured, whereas the rebalance refers to when the results from the screening date are implemented by way of index weights and constituents.
FIGURE 2: WISDOMTREE DEFA INDEX METHODOLOGY Methodology Eligible Universe Component companies must be incorporated and list their shares on one of the major stock exchanges in the following countries: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom, Japan, Australia, New Zealand, Hong Kong, Israel or Singapore. Liquidity Component companies must meet minimum market cap and liquidity screens to be eligible. An additional calculated volume factor is also applied to help improve liquidity. Weighting The initial weight of a component in the index is based on each component's Dividend Stream (derived by multiplying the U.S. dollar value of the company's annual gross dividend per share by the number of common shares outstanding for that company) divided by the total Dividend Stream of the index. Index Focus Index Name Index Selection Criteria Broad Market WisdomTree DEFA Index All companies that pass the initial screening requirements are included in the index. Source: WisdomTree. You cannot invest directly in an index. RELATIVE VALUE REBALANCE We use an annual rebalancing process to refresh Index constituent weights based on the concept of relative value. Weights change at the rebalance based on each stock s relative price appreciation compared to its relative dividend growth. Building dividend yield 9 quartiles using the EAFE Index as a benchmark allows us to aptly illustrate the impact of weighting and rebalancing back to the Dividend Stream. Below are a couple of highlights from figure 3 10 : + The WisdomTree DEFA Index has more than 45% of its weight in stocks with dividend yields above 4.1%. + The EAFE Index has about 29% of its weight in this same quartile (and only 2.4% of its weight in nondividend payers, indicating how broad the dividend-paying opportunity set truly is internationally). 9 Dividend yield: A financial ratio that shows how much a company pays out in dividends each year relative to its share price. 10 As of 5/31/15.
FIGURE 3: THE DIVIDEND STREAM CREATED AN INHERENT VALUATION ADVANTAGE Index Dividend Yields (6/30/2015) WisdomTree DEFA 3.93% EAFE 3.15% 50% 45% 45.5% Index Weight 40% 35% 30% 25% 20% 15% 28.7% 32.7% 32.9% 14.7% 20.6% 15.4% WT DEFA EAFE 10% 5% 0% 6.3% 2.4% 0.7% Above 4.1% Between 2.6% and 4.1% Between 1.6% and 2.6% Below 1.6% No Dividend Yield Sources: WisdomTree, Bloomberg, as of 6/30/15. Subject to change. Past performance is not indicative of future results. You cannot invest directly in an index. DOES IT MAKE SENSE TO LAYER CURRENCY EXPOSURE ON TOP OF EQUITIES? As we mentioned earlier, approximately 50% of the world s equity opportunities are outside the United States. So, in our opinion, there is no question that investing in international stocks is a smart idea whether the investor hedges the currencies or not. And currencies have sometimes pushed returns higher. The question then becomes whether investors want to take on the additional risk. Unhedged international strategies inherently have a bullish 11 opinion on foreign currencies. So for investors without an opinion on currency direction, hedged strategies can make a lot of sense. Plus, it s worth noting that currency-hedged strategies provide the purest access to the local equity returns as they essentially remove currency from the equation. In fact, many WisdomTree investors use hedged and unhedged strategies together. Consider that: + Currency Adds Risk, Not Returns: With the exception of the full period, from December 31, 1969, to June 30, 2015, when currency exposure added 1.2% per year, currency exposure detracted from the returns of the EAFE Index. 11 Bullish: A position that benefits when asset prices rise.
+ EAFE Currency Exposure Delivered Negative Sharpe Ratio in Every Period: While not surprising in the cases where the currency exposure delivered a negative return, it s interesting to note that from December 31, 1969, to June 30, 2015, the Sharpe ratio was still negative even though the return experience was positive. Why was this? Simply put, the 1.2% per year was not enough to exceed the risk-free rate during this same period. + Higher Current Correlation: In looking at the correlation between currency and equity, we see that over the full period, the correlation coefficient was 0.04, but over the last three-year period, it was 0.09 (more than twice as high) and over the most recent five-year period it was 0.41. This means that the currency risk passed through to unhedged returns has increased (4.5% over the last five years compared to 2.6% over the last 45 years). Given the consistent volatility reduction when currency risk has been removed, investors can see how currencyhedged strategies might serve as a better strategic baseline exposure for international equities and that the active decision would be to add in the currency risk if/when an investor has a positive view on it. FIGURE 4: : STRATEGIC QUESTION IS NOT WHY SHOULD I HEDGE? BUT RATHER WHY SHOULD I WAGER ON CURRENCIES? Average Annual Returns Average Annual Standard Deviation Sharpe Ratio EAFE w/ Currency 3 EAFE no Currency 4 EAFE FX 5 EAFE w/ Currency 3 EAFE no Currency 4 EAFE FX 5 Incremental Change in Risk 1 Correlation (Equities vs. Currency) 2 EAFE w/ Currency 3 EAFE no Currency 4 EAFE FX 5 12/31/1969 to 6/30/2015 9.0% 7.7% 1.2% 17.0% 14.4% 8.4% 2.6% 0.04 0.24 0.19 (0.45) 3-Year 12.0% 18.1% -5.2% 10.5% 8.4% 5.5% 2.1% 0.09 1.14 2.15 (0.94) 5-Year 9.5% 11.3% -1.6% 15.7% 11.2% 7.3% 4.5% 0.41 0.60 1.00 (0.22) 10-Year 5.1% 5.4% -0.3% 18.2% 14.6% 7.6% 3.6% 0.30 0.21 0.28 (0.21) 20-Year 5.2% 6.0% -0.7% 16.6% 14.6% 7.5% 2.0% 0.03 0.16 0.24 (0.44) 1 Incremental Change in Risk: Difference in volatility from taking EAFE w/ Currency and subtracting EAFE no Currency. 2 Correlation (Equities vs. Currency): Correlation between EAFE no Currency and EAFE Currency over specified period. 3 EAFE w/ Currency: Refers to the returns of the EAFE Index, calculated in U.S. dollars, that do include the impact of fluctuating foreign exchange rates relative to the U.S. dollar. 4 EAFE no Currency: Refers to the returns of the EAFE Index, calculated in local currency, that do not include the impact of fluctuating foreign exchange rates relative to the U.S. dollar. 5 EAFE FX: The currency impact difference of the currencies within the EAFE Index universe, measured relative to the U.S. dollar. Sources: WisdomTree, Bloomberg, as of 6/30/15. Past performance is not indicative of future results. You cannot invest directly in an index.
INTRODUCING THE WISDOMTREE INTERNATIONAL HEDGED EQUITY FUND (HDWM) The WisdomTree International Hedged Equity Fund (HDWM), which is designed to track the WisdomTree International Hedged Equity Index, is essentially the WisdomTree DEFA Fund (DWM), which tracks the WisdomTree DEFA Index, with a currency hedge overlay. HDWM uses the same stock selection and rebalancing methodology as DWM. The single difference is the currency hedge. When investors consider that the currencies in the EAFE Index have depreciated over the year that ended June 30, 2015, they can appreciate the idea behind hedging currency. The launch of HDWM enables investors to choose whether they would like to capitalize on the international Dividend Stream WITH or WITHOUT the currency exposure. HDWM offers investors: + The opportunity to capitalize on international companies + The ability to help magnify the impact dividends have on performance + The potential for limited downside protection due to the emphasis on selecting dividend-paying stocks and then weighting these stocks by their cash dividends, when measured against a market capitalization-weighted universe of stocks selected from the same underlying regions + The opportunity to mitigate the currency risks inherent in international investing HDWM at-a-glance Ticker: HDWM Exchange: NYSE Expense Ratio: 0.35% Structure: Open-end ETF Exposure: International dividend-paying stocks Rebalancing: The portfolio is rebalanced on an annual basis At WisdomTree, we do things differently. We build our ETFs with proprietary methodologies, smart structures and/ or uncommon access to provide investors with the potential for income, performance, diversification and more. For more information or to invest in HDWM, contact your financial professional.
This Fund is new and has limited operating history. You cannot invest directly in an index. Hedging can help returns when a foreign currency depreciates against the U.S. dollar, but it can hurt when the foreign currency appreciates against the U.S. dollar. Investors should carefully consider the investment objectives, risks, charges and expenses of the Fund before investing. To obtain a prospectus containing this and other important information, please call 866.909.WISE (9473) or visit wisdomtree. com. Investors should read the prospectus carefully before investing. There are risks associated with investing, including possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. To the extent the Fund invests a significant portion of its assets in the securities of companies in a single country or region, it is likely to be impacted by the events or conditions affecting that country or region. The Fund s exposure to certain sectors may increase its vulnerability to any single economic or regulatory development related to such sectors. The Fund uses various strategies to attempt to minimize the impact of changes in foreign currency against the U.S. dollar, which may not be successful. Derivative investments can be volatile, and these investments may be less liquid than other securities, and more sensitive to the effects of varied economic conditions. Due to the investment strategy of the Fund, it may make higher capital gain distributions than other ETFs. Please read the Fund s prospectus for specific details regarding the Fund s risk profile. ACWI Index: A free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed and emerging markets. WisdomTree DEFA Index: A fundamentally weighted index that measures the performance of dividend-paying companies in the industrialized world, excluding Canada and the United States, that pay regular cash dividends and meet other liquidity and capitalization requirements. It comprises companies incorporated in 16 developed European countries, Japan, Australia, New Zealand, Hong Kong and Singapore. Companies are weighted based on annual cash dividends paid. WisdomTree International Hedged Equity Index: A fundamentally weighted index that measures the performance of dividend-paying companies in the industrialized world, excluding Canada and the United States, that pay regular cash dividends and that meet other liquidity and capitalization requirements. It comprises companies incorporated in 16 developed European countries, Japan, Australia, New Zealand, Hong Kong and Singapore. Companies are weighted based on annual cash dividends paid. Currency fluctuations are hedged. EAFE Index: A market cap-weighted index composed of companies representative of the developed market structure of 21 developed countries in Europe, Australasia and Japan. WisdomTree Funds are distributed by Foreside Fund Services, LLC. WTGM-0485