• Related Products WisdomTree Dynamic International Equity Fund

Something subtle but significant is underway in global equity markets. After years of U.S.-centric asset allocation dominance, 2025 is shaping up as a pivot point. Inflows into equity strategies that deliberately exclude U.S. exposure have reversed a multiyear trend of net outflows, with more than $2.5 billion added in just the last three months.¹ This is not simply a temporary reaction to political volatility; it's an early recognition that the rest of the world is increasingly writing its own macroeconomic and corporate profitability stories. And for U.S.-based investors, the implications are timely: diversification is no longer a hedge—it may be a source of structural return.

Europe: From Stagnation Stereotype to Strategic Pivot

European equities have outperformed consensus expectations in 2025, and not just because of currency dynamics.² Core sectors like banking and defense have benefited from a steepening yield curve, a surge in defense commitments and recovering earnings power. While gross domestic product (GDP) growth remains subdued, equity markets are reflecting something deeper: stock-level dispersion is unusually high, signaling a return to idiosyncratic alpha. Structurally, five forces are at play:

³

• Political will around the Savings and Investments Union, with progress on securitization deregulation expected by June 17, 2025.
• Signs of artificial intelligence (AI) adoption delivering return on investment (ROI), with over 60% of the MSCI Europe Index weighted toward AI adopters.
• Execution around Germany’s fiscal expansion, including project awards likely in the fall and an unlimited defense budget.
• Structurally rising defense spending, expected to ultimately pull in related tech investment.
• Resilient mergers and acquisitions (M&A) activity, supported by easing competition rules, healthy balance sheets and a fragmented corporate landscape.

In valuation terms, European equities continue to trade at a meaningful discount to U.S. peers—yet the earnings base is strengthening beneath the surface.

Japan: Corporate Reform Moves from Narrative to Earnings

In Japan, what had been a hopeful reform story is increasingly showing up in the numbers. Domestic-oriented companies have outperformed exporters, bolstered by wage growth, better governance and targeted capital allocation improvements.4 While global investors have long debated the sustainability of Japan’s equity rallies, the current environment is different. The Tokyo Stock Exchange’s push for governance reform, combined with pressure to unwind legacy cross-holdings and simplify parent-subsidiary structures, is translating into better margin profiles and return on equity.

⁵ Strategists see the potential for continued rerating as Japanese companies deliver earnings less sensitive to the yen and more tied to corporate behavior.

Portfolio Construction: Moving Beyond Home Bias

The rethink of geographic allocation is not simply about avoiding risks—it’s about capturing evolving structural asymmetries. While U.S. equities remain powerful innovation engines, their dominance in global indexes now masks the opportunity set elsewhere. Many institutional equity portfolios carry a hidden overexposure to U.S. mega-cap tech, and the question is not whether to abandon it, but whether the next decade’s return profile will be better balanced with regions undergoing deep structural change.6 Europe and Japan are offering what U.S. equities delivered in past cycles: rerating potential linked to margin expansion, not just revenue growth.

The Stock Picker’s Market Is Global Now

Perhaps most compelling is that beneath modest top-down GDP figures, international markets are offering highly fertile ground for active strategies. Stock-level dispersion in Europe is running above historical averages, and factors like idiosyncratic momentum, earnings revisions and accruals are delivering higher-than-normal Sharpe ratios. These are precisely the environments where stock selection—not sector or beta allocation—adds real value.⁷ For U.S.-based allocators, this is not about abandoning what has worked domestically but recognizing that the alpha is no longer confined by geography. The structural bull cases being built abroad—especially in sectors like energy infrastructure, financial modernization and dual-use technology—are too material to ignore.

The WisdomTree Dynamic International Equity Fund (DDWM)

DDWM is designed to track the total return performance, before fees and expenses, of the WisdomTree Dynamic International Equity Index. This broad approach (2,439 positions as of May 23, 2025) includes developed international dividend payers and weights them based on their cash dividends. Weighting in this way as opposed to market capitalization tends to mitigate the risk of undue exposure to firms with higher valuations.

Figure 1: Standardized Returns

Figure 2 highlights the consistent outperformance of the DDWM strategy over the MSCI EAFE Index across multiple timeframes, particularly over the past one, three and five years. While the MSCI EAFE leads year-to-date in 2025, DDWM has delivered higher compounded returns over the longer term, including since inception. This pattern points to a strategy that rewards patience and has the potential to compound effectively across cycles.

Figure 2: DDWM’s Long-Term Return Strength vs. MSCI EAFE Index

Figure 3 compares sector allocations between DDWM and the MSCI EAFE Index as of April 30, 2025. DDWM exhibits notable over-weight positions in Financials, Health Care and Utilities while under-weighting sectors like Information Technology and Real Estate compared to the benchmark. The allocation suggests an emphasis on quality and defensiveness, with a tilt toward income-generating and stable-growth sectors.

Figure 3: DDWM’s Sector Dispersion Is Not Extreme Compared to MSCI EAFE Index

Figure 4 highlights that DDWM delivers a higher total shareholder yield than the MSCI EAFE Index, driven by both dividend yield and share reduction yield. By weighting holdings based on cash dividends, DDWM naturally emphasizes companies with stronger income distribution practices, resulting in a 4.06% trailing 12-month dividend yield versus 3.02% for the benchmark. While share repurchases are not the primary selection factor, the portfolio still benefits from a higher 1.27% share reduction yield.

Figure 4: Total Shareholder Yield for International Equities

Figure 5 underscores DDWM’s relative valuation advantage across key metrics compared to the MSCI EAFE Index. Whether looking at price-to-earnings, price-to-cash flow or price-to-book, DDWM consistently trades at more attractive levels—helping mitigate valuation risk. For investors concerned about elevated multiples in U.S. markets, this signals a disciplined approach to international equity exposure with a strong value orientation.

Figure 5: DDWM’s Overall Lower Valuation vs. MSCI EAFE Index

Conclusion: A More Disciplined Path to Global Diversification

In a world where investors are increasingly questioning concentration risk and valuation extremes in U.S. equities, DDWM presents a differentiated, rules-based approach to international markets that blends quality, income and valuation discipline. Its emphasis on dynamic currency hedging, shareholder yield and lower valuation multiples delivers a portfolio designed to navigate global complexity without overpaying for growth. For those seeking to rebalance their equity exposure toward regions undergoing meaningful structural reform—while still demanding disciplined capital return and resilient fundamentals—DDWM stands out as a compelling vehicle to reengage with the broader opportunity set beyond U.S. borders.

¹Source: “Investors flock to equity funds that exclude US,” Financial Times, 5/13/25.

²Source: “Europe Insight: European equities mid-year outlook – Navigating choppy waters,” Morgan Stanley, Morgan Stanley Research, 5/21/25.

³Source: Morgan Stanley, 2025.

⁴Source: “Japan Insight: Japan equity strategy mid-year outlook – Patience before triumph,” Morgan Stanley MUFG, Morgan Stanley Research, 5/20/25.

⁵Source: Morgan Stanley MUFG, 2025.

⁶Source: Morgan Stanley, 2025.

⁷Source: Morgan Stanley, 2025.