WisdomTree & Currency Hedging
Currency Hedging in Today s World The influence of central bank policy Gauging the impact currency has had on international returns Is it expensive to hedge currency risk? Thinking about when to hedge currency risk What does dynamically hedged currency look like? How to think about currency risk from an index construction standpoint without necessarily hedging the exposure 2
Central Bank Policy Divergence Potential to Signal a Stronger Dollar, Especially versus the Euro and Yen Easing Bias Central Bank Policy Pendulum Tightening Bias What Does QE Accomplish 1 : European Central Bank Bank of Japan Federal Reserve Higher inflation expectations Currency depreciation Higher equity valuations Bank of England Lower real interest rates 1 James Bullard, OMFIF Golden Series Lecture, May 23, 2013 Arrows: Indicates that central banks have announced monetary policy measures through2015 Dots: Indicates how aggressive central banks have been in easing monetary policy through both conventional and unconventional monetary policy easing measures through 2015 Source: WisdomTree, Relevant Central Bank Websites, Bloomberg. Past performance is not indicative of future results. 3
Avg. Annual Return Cumulative Dollar Impact on MSCI EAFE Index Returns Currencies in the MSCI EAFE Index Complex have Displayed Cycles that Average 8 Years 2.35 2.15 Dollar Weakens Dollar Strengthens Dollar Weakens Dollar Strengthens 1.95 1.75 1.55 1.35 1.15 0.95 0.75 Dollar Weakens Dollar Strengthens Currency Trend Periods Average Annual Returns for MSCI EAFE Currencies Average Annual Returns for MSCI EAFE Local Equity Markets Dec 31, 1969 - Oct 31, 1978 5.1% 4.8% Nov 1, 1978 - Feb 28, 1985-8.1% 16.9% Mar 1, 1985 - Apr 28, 1995 8.3% 8.7% May 1, 1995 - Jan 31, 2002-5.7% 7.7% Feb 1, 2002 - Jul 31, 2011 5.2% 2. August 1, 2011 - Dec 31, 2015-5.9% 9.7% Entire Period 1.1% 7.6% 12% 1 8% 6% 4% 2% MSCI EAFE Index in Local Currency (12/31/1969-12/31/2015) 11.2% 7.6% 5.4% Down Currency Trend Up Currency Trend All Periods Source: MSCI as of 12/31/2015. Past performance is not indicative of future results. You cannot invest directly in an index. 4
Strategic Question is Not: Why Should I? But Rather Why Should I Wager on Currencies? MSCI EAFE w/ Currency Average Annual Returns Average Annual Standard Deviation Incremental MSCI EAFE No EAFE MSCI EAFE w/ MSCI EAFE No EAFE Change in Currency FX Currency Currency FX Risk Correlation (Equities vs. MSCI EAFE w/ Currency Sharpe Ratio MSCI EAFE No Currency Currency) 12/31/69-12/31/15 8.8% 7.6% 1.1% 17. 14.4% 8.4% 2.6% 0.04 0.23 0.18 3-Year 5. 12.3% -6.5% 12.6% 11.4% 5.6% 1.2% (0.03) 0.39 1.07 5-Year 3.6% 7.9% -3.9% 15. 12.2% 6.3% 2.8% 0.24 0.24 0.64 10-Year 3. 3.2% -0.2% 18.5% 14.9% 7.6% 3.6% 0.29 0.10 0.14 20-year 4.4% 4.9% -0.5% 16.7% 14.8% 7.4% 2. 0.04 0.12 0.17 *Equity: Volatility of the equity prices denominated in their local currency, in this case EAFE FX. **Currency: Incremental volatility added to the local due to changes in the value of EAFE FX relative to the U.S. dollar. ***Currency + Equity: Volatility of the combination of both the local equity prices denominated in local currency as well as that of the EAFE FX relative to the U.S. dollar. Source: WisdomTree, MSCI, 12/31/69-12/31/15. Past performance is not indicative of future results. Subject to change. EAFE FX refers to the underlying currency exposure of the MSCI EAFE Index. You cannot invest directly in an index. 5
Annualized Interest Rate Differentials Relative to U.S. Myth of Currency Hedging: It is Expensive to Your Currency Risk 14.0 12.0 10.0 8.0 6.0 4.0 Cost of Hedging Currency with 1-Month Forwards Primarily Based on Interest Rate Differentials (trailing 12 month ending 12/31/2015) 12.94% 11.12% 11.56% 6.5 7.0 4.4 4.89% 2.0 0.0-2.0-4.0-1.5-0.59% -0.57% 0.17% 1.13%2.08% -0.21% -0.18%-0.01% 0.10.3 WT Intl Equity (Dynamic ) refers to WisdomTree Dynamic Currency d International Equity, WT Intl Equity refers to WisdomTree International Equity, WT Intl Small Cap Dividend (Dynamic ) refers to WisdomTree Dynamic Currency d International SmallCap Equity, WT Intl Small Cap Dividend refers to WisdomTree International SmallCap Dividend, WT Global ex US d Dividend refers to WisdomTree Global ex-u.s. d Dividend, WT Emerging Markets Dividend refers to WisdomTree Emerging Markets Dividend Analysis done at the index level only. WT stands for WisdomTree. WisdomTree International d Quality Dividend Growth formerly known as WisdomTree International d Dividend Growth, WisdomTree International Equity Index formerly known as WisdomTree DEFA Index Source: Bloomberg. Subject to change. Past performance is not indicative of future results. You cannot invest directly in an index. 6
Cumulative Interest Rate Differential One Was Paid Positive Interest Rate Differentials to EAFE: Dynamic Hedging Increased Amount 25% 2 15% 1 5% Cumulative interest rate differential (IRD) gained from hedging MSCI EAFE to USD (USD base; 12/31/1988-12/31/2015) Whole Period Annualized IRD 10 Passive Currency ¹ 0.38% Multi Signal Overlay Currency ¹ 0.69% 20.49% 10.88% Paid to -5% -1 Dec-88 Mar-91 Jun-93 Sep-95 Dec-97 Mar-00 Jun-02 Sep-04 Dec-06 Mar-09 Jun-11 Sep-13 Dec-15 Interest Rates Contribution Value and Momentum Contribution 10 Passive Signal Overlay Cost to Source: WisdomTree, MSCI, Record Currency Management, WM/Reuters. Interest rate differentials (IRD) based on 1-month FX forward prices. Euro legacy currencies proxied with Deutsche mark prior to 12/31/1998. Hong Kong Dollar excluded. ¹Currencies and exposures are reflective of the universe of the MSCI EAFE Index from 12/31/1988 to 12/31/2015. Past performance is not indicative of future results. You cannot invest directly in an index. 7
Rolling 3yr Annualized Interest Rate Differential Rolling Interest Rate Differential - EUR 3% 2% 3yr Rolling Annualized Interest Rate Differential (IRD) Gained from Hedging EUR to USD 12/31/1988-12/31/2015 - USD Base Paid to 1% -1% 0.26% 0.2-2% -3% -4% -5% Dec-91 Dec-93 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15 Cost to Interest Rates Contribution Value and Momentum Contribution 10 Passive Signal Overlay Source: WisdomTree, MSCI, Record Currency Management, WM/Reuters. Interest rate differentials (IRD) based on 1-months FX forward prices. Past performance is not indicative of future results. You cannot invest directly in an index. 8
Rolling 3yr Annualized Interest Rate Differential Rolling Interest Rate Differential - JPY 7% 6% 3yr Rolling Annualized Interest Rate Differential (IRD) Gained from Hedging JPY to USD 12/31/1988-12/31/2015 - USD Base Paid to 5% 4% 3% 2% 1% -1% 0.34% 0.3-2% Dec-91 Dec-93 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15 Interest Rates Contribution Value and Momentum Contribution 10 Passive Signal Overlay Cost to Source: WisdomTree, MSCI, Record Currency Management, WM/Reuters. Interest rate differentials (IRD) based on 1-month FX forwards. Past performance is not indicative of future results. You cannot invest directly in an index. 9
EUR TWI Correlation JPY TWI Correlation Correlation and Volatility of Europe and Japan Currency, Equity 110 105 100 95 Correlation of MSCI EMU Index and EUR TWI 0.18 0.8 0.6 0.4 0.2 200 180 160 0.06 0.6 0.4 0.2 0 90 0 140-0.2 85 80 75 70-0.26-0.57-0.2-0.4-0.6-0.8 120 100 80-0.53-0.39-0.4-0.6-0.8-1 Correlation MSCI EMU (No Currency) and EUR TWI EUR TWI Correlation MSCI Japan (No Currency) and JPY TWI JPY TWI Average Annual Standard Deviation MSCI EMU w/ Currency MSCI EMU No Currency EMU FX Incremental Change in Risk Correlation (Equities vs. Currency) 12/31/87-12/31/2015 19.9% 17.8% 10.4% 2. (0.08) 3-Year 15.7% 14.3% 8.5% 1.4% (0.14) 5-Year 19.6% 15.5% 9.3% 4.2% 0.21 10-Year 23.3% 17.6% 10.9% 5.6% 0.31 20-year 21.1% 18.8% 10.1% 2.3% (0.01) Average Annual Standard Deviation MSCI Japan w/ Currency MSCI Japan No Currency Japan Currency Incremental Change in Risk Correlation (Equities vs. Currency) 12/31/69-12/31/15 21.1% 18.6% 11.1% 2.48% (0.07) 3-Year 13.4% 17. 7.8% -3.54% (0.63) 5-Year 14. 18.1% 7.9% -4.01% (0.66) 10-Year 15.5% 19.3% 9.5% -3.89% (0.62) 20-year 18. 18.1% 10.6% -0.06% (0.30) Source: WisdomTree, Bloomberg as of 12/31/2015. Past performance is not indicative of future results. You cannot invest directly in an index. Analysis done at the index level only. Investment universe is the respect MSCI regional indexes, start dates chosen to reflect longest available data, *JPY TWI: Japan Trade weighted Index which is the value of the currency vs. its major trade partners **EUR TWI: Euro Trade weighted Index which is the value of the currency vs. its major trade partners 10
Signals Shown to Impact Currency Moves Interest Rates Momentum Value 1. Interest rate premia exist due to persistent macroeconomic imbalances between countries 2. Current account deficit countries offer higher real interest rates to attract foreign capital into the economy 3. Exporters of capital are rewarded via the interest rate for taking on currency risk as currency does not depreciate by as much as implied by the FX forward rate pricing 4. Signal operates at the short to medium term horizon 1. Tendency for currencies to appreciate following a previous appreciation and depreciate after a prior depreciation 2. Pricing inefficiency 3. Herding speculators, flight to safety as a result of market shocks, delta hedging from banks, and divergence in market participants beliefs about currency fair value amplify currency trends 4. Signal operates at the short to medium term horizon 1. Substantial exchange rate deviations from fundamental levels are unsustainable 2. Purchasing Power Parity (PPP) recognized as a good predictor of the long term direction of the exchange rate 3. Economic opportunities, adjustments via terms of trade, and central bank interventions help revert currencies back towards fair value 4. Signal operates over the medium to long term Source: WisdomTree, Record Currency Management as of 12/31/2015 11
Latest Currency Ratios by Signal and Defining Rules of Each Signal Currency Value Signal Ratio Overlay Ratio Momentum Signal Ratio Interest Rate Signal Ratio Total Ratio AUD 16.67% 33.33% 0.0 50.0 CHF 33.33% 33.33% 33.33% 100.0 EUR 16.67% 33.33% 33.33% 83.33% GBP 16.67% 33.33% 33.33% 83.33% JPY 16.67% 0.0 33.33% 50.0 NOK 16.67% 33.33% 0.0 50.0 NZD 16.67% 33.33% 0.0 50.0 SEK 16.67% 33.33% 33.33% 83.33% Momentum Signal: When the 10-day moving average of a currency s spot price versus U.S. dollar is weaker than the 240-day moving average (a currency is depreciating), a hedge ratio of 33.3% is applied to the Index. Interest Rate Signal: If the implied interest rate in the U.S. is > that of a targeted currency using one month FX forward rates, a hedge ratio of 33.3% is applied to the Index. Value Signal: A) If a currency is > 2 overvalued against PPP level and until it crosses PPP, the hedge ratio of 33.3% is applied to the Index. B) When a currency is between 2 overvalued and 2 undervalued and until it crosses one of these levels, the hedge ratio is set to 16.667% (or ½ of the signal total hedge ratio) for the Index. C) When an individual currency is >2 undervalued against PPP and until it crosses PPP, the hedge ratio is set to zero to the Index. Source: WisdomTree, Record Currency Management as of 12/31/2015. PPP: Purchasing power parity. 12
Ratio Cumulative Return Ratio Cumulative Return Ratio Cumulative Return Ratio Cumulative Return Ratio Evolution by Signal and Currency EUR Exposure 10 4 8 2 6 4-2 2-4 -6 Dec-88 May-94 Oct-99 Mar-05 Aug-10 Value Interest Rates Momentum 10 Passive GBP Exposure 10 4 8 2 6 4-2 2-4 -6 Dec-88 May-94 Oct-99 Mar-05 Aug-10 Value Interest Rates Momentum 10 Passive JPY Exposure 10 4 8 2 6 4 2-2 -4 Dec-88 May-94 Oct-99 Mar-05 Aug-10 Value Interest Rates Momentum 10 Passive MSCI EAFE 10 4 8 2 6 4 2-2 -4 Dec-88 May-94 Oct-99 Mar-05 Aug-10 Value Interest Rates Momentum 10 Passive Source: WisdomTree, MSCI, Record Currency Management as of 12/31/2015. 10 passive hedge returns and signal overlay hedge ratio from 12/31/1988 to 12/31/2015. Past performance is not indicative of future results. You cannot invest directly in an index. 13
Cumulative returns Cumulative Return Cumulative Return Cumulative Return Cumulative Hedging Returns by Signal for USD Base Exposure Currencies EUR Exposure 15 JPY Exposure 4 10-1 5-6 Dec-88 Feb-92 Apr-95 Jun-98 Aug-01 Oct-04 Dec-07 Feb-11 Apr-14 10 Passive Signal Overlay Momentum Overlay Interest Rates Overlay Value Overlay 2 GBP Exposure -5 Dec-88 Feb-92 Apr-95 Jun-98 Aug-01 Oct-04 Dec-07 Feb-11 Apr-14 10 Passive Signal Overlay Momentum Overlay Interest Rates Overlay Value Overlay 10 CHF Exposure 5-2 -4-5 -6 Dec-88 Feb-92 Apr-95 Jun-98 Aug-01 Oct-04 Dec-07 Feb-11 Apr-14 10 Passive Signal Overlay Momentum Overlay Interest Rates Overlay Value Overlay -10 Dec-88 Feb-92 Apr-95 Jun-98 Aug-01 Oct-04 Dec-07 Feb-11 Apr-14 10 Passive Signal Overlay Momentum Overlay Interest Rates Overlay Value Overlay Source: WisdomTree, Record Currency Management from 12/31/1988 to 12/31/2015. For EUR exposure, Deutsche mark is used prior to 12/31/1998. Past performance is not indicative of future results. You cannot invest directly in an index. 14
Cumulative Return Cumulative Hedging Returns by Signal for MSCI EAFE Index Exposure 6 5 4 3 2 1-1 -2-3 Cumulative Return for Passive Hedging and Record Signal Overlay for Weighted MSCI EAFE Currency Exposure (12/31/1988-12/31/2015) - USD Base -4 Dec-88 Feb-92 Apr-95 Jun-98 Aug-01 Oct-04 Dec-07 Feb-11 Apr-14 10 Passive Signal Overlay Momentum Overlay Interest Rates Overlay Value Overlay 51.07% 35.34% 33.6 11.43% -11.15% Unhedged Annualized performance (12/31/1988-12/31/2015) 5 Passive 10 Passive Momentum Overlay Value Overlay Interest Record Signal Rates Overlay Overlay Relative Return 0.0-0.14% -0.44% 1.13% 0.4 1.54% 1.08% Source: WisdomTree, Record Currency Management, MSCI, OECD as of 12/31/2015. Past performance is not indicative of future results. You cannot invest directly in an index. 15
Annualized Excess Hedging Returns by Signal for USD Base Exposure Currencies and Various Benchmarks Momentum Overlay Annualized value added to respective currency exposure using momentum overlay (12/31/1988-12/31/2015) Currency Exposure AUD EUR GBP CHF JPY MSCI EAFE Weighted Unhedged -1.06% 1.28% -0.84% -0.13% 2.55% 1.13% 5 d 0.46% 1.71% 0.01% 0.5 1.92% 1.27% 10 d 2.28% 2.4 1.06% 1.45% 1.58% 1.56% Interest Rates Overlay Annualized value added to respective currency exposure using interest rates overlay (12/31/1988-12/31/2015) Currency Exposure AUD EUR GBP CHF JPY MSCI EAFE Weighted Unhedged 0.86% 1.55% -0.33% -0.53% 2.09% 1.54% 5 d 2.38% 1.98% 0.51% 0.11% 1.46% 1.68% 10 d 4.2 2.68% 1.56% 1.06% 1.13% 1.98% Value Overlay Annualized value added to respective currency exposure using value overlay (12/31/1988-12/31/2015) Currency Exposure AUD EUR GBP CHF JPY MSCI EAFE Weighted Unhedged -0.73% 0.28% -0.38% -1.72% 0.7 0.4 5 d 0.8 0.71% 0.47% -1.08% 0.07% 0.54% 10 d 2.61% 1.41% 1.52% -0.14% -0.26% 0.84% Signal Overlay Annualized value added to respective currency exposure using signal overlay (12/31/1988-12/31/2015) Currency Exposure AUD EUR GBP CHF JPY MSCI EAFE Weighted Unhedged -0.22% 1.13% -0.44% -0.67% 1.88% 1.08% 5 d 1.3 1.55% 0.4-0.04% 1.25% 1.22% 10 d 3.12% 2.25% 1.45% 0.91% 0.92% 1.52% Source: WisdomTree, Record Currency Management, 12/31/88-12/31/15. Past performance is not indicative of future results. You cannot invest directly in an index. 16
Ratio USD/EUR Spot rate Interest rate differential implied in 1m forward FX rate (USDEUR, % p.a.) Interest Rates Signal Example: USD/EUR Strong EUR Strong USD 1.6 1.5 1.4 1.3 1.2 1.1 1.0 0.9 10 10 0.8 Spot 0.7 Interest Rate Differential 0.6 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 10 10 8. 6. 4. 2. 0. -2. -4. -6. -8. 10 5 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Source: WisdomTree, Record Currency Management, Reuters. Positions are opened and closed at subsequent month-end. Period: 12/31/1988 12/31/2015. Prior to 12/31/1998, the Deutsche mark is used for the euro. Past performance is not indicative of future results. 17
Ratio USD/EUR Spot rate (10 day m.a. crosses 240 day m.a. - below to hedge, above to unhedge) Momentum Signal Example: USD/EUR 1.7 1.6 1.5 1.4 1.3 1.2 1.1 10 1 Spot 10 day average 240 day average 10 10 10 10 10 10 10 10 0.9 0.8 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 10 Strong EUR Strong USD 5 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Source: WisdomTree, Record Currency Management, Reuters, WisdomTree. Period: 12/31/1988 12/31/2015. Positions are opened and closed at subsequent month-end. M.A.: Moving average. Prior to 12/31/1998 the Deutsche mark was used for the euro. Past performance is not indicative of future results. 18
Ratio USD/EUR Spot rate (Shown with +/- 2 of PPP as part of the value signal) Value Signal Example: USD/EUR 1.6 1.5 1.4 1.3 1.2 1.1 1.0 10 0.9 5 Smoothed Spot 0.8 PPP 0.7 PPP - 2 PPP + 2 0.6 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 5 10 5 Strong EUR Strong USD 10 5 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Source: WisdomTree, Record Currency Management, Reuters, OECD. Positions are opened and closed at subsequent month-end. Period: 12/31/1988 12/31/2015. Smoothed spot refers to a 20-day moving average calculation aiming to smooth anomalous price movements. Prior to 12/31/1998, the Deutsche mark was used for the euro. Past performance is not indicative of future results. 19
Annual Gross Overlay/Hedging Return Calendar Year Hedging Returns for MSCI EAFE Currency Exposure 15% 1 5% -5% -1-15% Calendar Year Hedging/Overlay Returns for MSCI EAFE Weighted Currency Exposure 12/31/1988 to 12/31/2015 - USD Base Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 10 Passive 5 Passive Record Signal Overlay Count of Full Years # of Value Add Years # of Value detract Years Mean Value Add Year Mean Value detract Year Mean Year 5 Passive 10 Passive Signal Overlay 27 27 27 12 12 13 15 15 14 3.87% 7.75% 6.15% -3.2-6.4-3.36% -0.06% -0.11% 1.22% Source: WisdomTree, Record Currency Management, MSCI, OECD as of 12/31/2015. Past performance is not indicative of future results. You cannot invest directly in an index. 20
Performance of MSCI EMU Index with Overlay Annualized Returns Years to 12/31/2015 Unhedged 5 Passive 10 Passive Record Signal Overlay Local Returns 1-Year -1.42% 3.73% 8.83% 7.14% 9.82% 3- Year 5.2 8.71% 12.13% 11.27% 12.22% 5-Year 3.05% 5.49% 7.76% 7.02% 7.49% 10-Year 2.25% 3.24% 3.93% 3.99% 3.09% 15-Year 2.41% 2.15% 1.61% 4.22% 1.42% Since Euro Inception 2.61% 3.15% 3.41% 5.59% 3.08% Annualized Volatility Years to 12/31/2015 Unhedged 5 Passive 10 Passive Record Signal Overlay Local Returns 1-Year 16.1 17.32% 20.04% 18.99% 20.19% 3- Year 15.7 14.4 14.28% 14.98% 14.31% 5-Year 19.63% 17.05% 15.47% 17.32% 15.47% 10-Year 23.28% 19.87% 17.51% 19.19% 17.64% 15-Year 22.39% 19.89% 18.52% 19.51% 18.51% Since Euro Inception 21.76% 19.44% 18.34% 19.19% 18.33% Since euro Inception of 12/31/1998. Past performance is not indicative of future results. You cannot invest directly in an index. 21
Performance of MSCI Japan Index with Overlay Years to 12/31/2015 Unhedged Annualized Returns 5 Passive 10 Passive Record Signal Overlay Local Returns 1-Year 9.57% 9.59% 9.5 8.75% 9.93% 3- Year 10.17% 16.07% 22.08% 21.23% 22.99% 5-Year 4.38% 8.27% 12.12% 11.48% 12.95% 10-Year 0.91% 1.24% 1.35% 2.08% 1.1 15-Year 2.12% 2.87% 3.4 3.95% 2.48% 20-Year 0.37% 1.92% 3.21% 3.49% 1.15% Full Data Availability -0.31% 0.7 1.42% 2.15% -0.45% Years to 12/31/2015 Unhedged Annualized Volatility 5 Passive 10 Passive Record Signal Overlay Local Returns 1-Year 16.05% 17.63% 19.65% 18.96% 19.66% 3- Year 13.45% 14.7 16.78% 16.48% 16.99% 5-Year 14.04% 15.54% 17.82% 17.41% 18.05% 10-Year 15.45% 16.85% 19.34% 18.43% 19.34% 15-Year 16.37% 16.74% 18.33% 17.76% 18.29% 20-Year 18.03% 17.35% 18.24% 17.85% 18.09% Full Data Availability 20.76% 19.52% 19.75% 19.77% 19.56% Full data availability starting 12/31/1988. Past performance is not indicative of future results. You cannot invest directly in an index. 22
Performance of MSCI EAFE Index with Overlay Years to 12/31/2015 Unhedged Annualized Returns 5 Passive 10 Passive Record Signal Overlay Local Returns 1-Year -0.81% 2.06% 4.91% 2.72% 5.33% 3- Year 5.01% 8.45% 11.91% 10.43% 12.3 5-Year 3.6 5.67% 7.67% 6.86% 7.85% 10-Year 3.03% 3.45% 3.72% 3.82% 3.23% 15-Year 3.54% 3.24% 2.81% 4.42% 2.68% 20-Year 4.42% 5.05% 5.54% 6.62% 4.91% Full Data Availability 4.34% 4.52% 4.54% 5.87% 4.33% Years to 12/31/2015 Unhedged Annualized Volatility 5 Passive 10 Passive Record Signal Overlay 1-Year 15.24% 15.28% 15.99% 15.94% 16.01% 3- Year 12.64% 11.7 11.4 12.05% 11.4 5-Year 14.99% 13.28% 12.16% 13.56% 12.18% 10-Year 18.48% 16.31% 14.79% 15.98% 14.89% 15-Year 17.46% 15.78% 14.87% 15.59% 14.88% 20-Year 16.74% 15.41% 14.89% 15.37% 14.79% Full Data Availability 17.19% 15.72% 15.18% 15.63% 15.06% Full data availability starting 12/31/1988. Past performance is not indicative of future results. You cannot invest directly in an index. Local Returns 23
Currency Impact Can Also Influence Different Types of U.S. Equities Source: Bloomberg, with data from 6/1/2015 to 2/5/2016. Data begins with the inception date of the WisdomTree Strong Dollar and Weak Dollar U.S. Equity Indexes. You cannot invest directly in an Index. Past performance is not indicative of future results. 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. 24
Why Exponential Weighting? Increased Sensitivity to How Stocks Reacted to Moves in the U.S. Dollar S&P 500 constituents as of December 31, 2015 are weighted three ways: Equal-Weighting: Every stock receives the same weight, but there is no change in weight based on the correlation of returns between stocks and the U.S. dollar. Market capitalization weighting: Stocks with the greatest market capitalization receive the greatest weights, but there is no direct relationship between market capitalization and the correlation of stock returns with returns of the U.S. dollar. Exponential weighting: Directly ties the correlation of returns of stocks to the returns of the U.S. dollar to the weighting. This example tilts more weight toward stocks whose returns had a higher correlation to the returns of the U.S. dollar, and less weight to stocks whose returns had a lower correlation to the returns of the U.S. dollar. Sources: WisdomTree, Bloomberg, Matlab. Data as of 12/31/2015. Universe is the S&P 500 Index constituents. The left, vertical axis indicates constituent weighting within the Exponential Weight (blue line) and Equal Weight (orange line) examples. The Right vertical axis indicates constituent weighting within the Market Cap Weight (green line) example. The horizontal axis places the stock whose returns had the highest correlation to the returns of the U.S. dollar on the left and the stock whose returns had the lowest correlation to the returns of the U.S. dollar on the right. Since the blue line slopes downward smoothly from left to right, it is indicating a smooth relationship between correlation of returns to the returns of the U.S. dollar and constituent weight. Subject to change, You cannot invest directly in an index. 25
Geographic Revenue Illustrates Strong Contrast Between the Indexes Sources: WisdomTree, FactSet, Standard & Poor s. Data as of 12/31/15 when the indexes began their live performance calculation. Strong dollar refers to WisdomTree Strong Dollar U.S. Equity Index. Weak dollar refers to WisdomTree Weak Dollar U.S. Equity Index. Due to the selection rules of the WisdomTree Strong Dollar U.S. Equity index, stocks in the Energy and Materials sectors, tending to have returns that have exhibited significantly negative correlations with the returns of the U.S. dollar, are not eligible for inclusion. Past performance is not indicative of future results. You cannot invest directly in an index. 26
Relative Weight Differentials in Strong Dollar / Weak Dollar Indexes Strong Dollar Tilts 1 Weak Dollar Tilts 2 Sources: Bloomberg, FactSet, Standard & Poor s. Data as of 12/31/15. 1 Strong Dollar Tilts: Refers to Utilities, Financials, Consumer Discretionary and Telecommunication Services, where the WisdomTree Strong Dollar U.S. Equity Index exhibits an over-weight compared to the S&P 500 Index. 2 Weak Dollar Tilts: Refers to Energy, Health Care, Information Technology, Industrials and Materials, where the WisdomTree Weak Dollar U.S. Equity Index exhibited over-weights versus the S&P 500 Index. Energy was the exception and is considered a weak-dollar tilt because it is not included in the WisdomTree Strong Dollar U.S. Equity Index. Subject to change. You cannot invest directly in an index. 27
Thinking about Currency s Impact on Emerging Market Equities Source: Bloomberg, with data from 6/1/2015, the Inception Date for the WisdomTree Strong Dollar Emerging Markets Equity Index, to 2/5/2016. You cannot invest directly within an Index. Past performance is not indicative of future results. 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. 28
Conclusion What is an appropriate baseline exposure to currency exposure? Unhedged? (meaning holding the full amount of currency risk) d? (meaning seeking to mitigate the full amount of currency risk) 5 d? (meaning seeking to mitigate half of the currency risk) Dynamically d? (letting a rules-based process determine how much currency risk should be hedged on a currency-by-currency basis) Marrying index construction with currency risk considerations Client Feedback we have a constant interest in how our clients are thinking about currency risk and what they think about the potential tools available to manage it 29