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Dollar Sensitivity: The New Style And Size Debate

Dollar Sensitivity: The New Style And Size Debate by Jeremy Schwartz, Director of Research, The WisdomTree Blog

When making investment decisions, many are familiar with making allocation decisions between large and small caps or between growth and value stocks. These decisions to over- or under-weight different segments of the market are what drive relative returns, and depending on your allocation mix, the returns can be quite different. Recently, as a result of the divergence in central bank policies, investors have also had to take views on currency risk, with clear winners and losers. Increasingly, we have seen investors shift away from currency risk in the developed international markets—specifically Europe and Japan—and focus just on the equities through currency-hedged indexes. But what about the currency impact on domestic equities?

Currency Factor in U.S. Equities

Currency moves are not just important to foreign markets. In the U.S., we have also seen U.S. dollar strength impact stocks that are exposed to sales in foreign markets. It is widely known that a significant percentage of the revenues of U.S. companies in the S&P 500 Index comes from abroad. If the U.S. dollar continues to strengthen, this is likely to provide continued headwind for the companies with meaningful revenue from and business exposure in foreign markets. By contrast, if the U.S. dollar reverses, these firms should benefit.

WisdomTree designed two new U.S. equity factor Indexes to help position investors according to their view of the U.S. dollar’s direction.