HEDJ Wisdom Tree Europe Hedged Equity Fund

Shares of European companies have moved back on track lately, as more optimism has been seen in this crucial market. Reduced debt worries and stronger growth in some key members are largely the cause of this move higher, while strength in a number of Europe’s top trading partners hasn’t hurt either.

And to further support growth, the ECB recently cut its benchmark rate to a fresh low of just 0.25%. This came as inflation dropped to just 0.7% in October—well below the 2% annual target—suggesting that rapidly rising prices aren’t a concern at all.

If this wasn’t enough, there are now rumors that the ECB is now thinking of taking the deposit rate into negative territory as an added measure. This plan, according to Bloomberg, could reduce the rate for commercial lenders to -0.1% from the current rate, and it would be the first time that the central bank has adjusted rates by less than a quarter percentage point (see all the European ETFs here).

It is believed that this measure will help increase lending and boost inflation up closer to the target rate. After all, if it does go into negative territory, banks will be paying to keep excess reserves at the ECB, and the theory is that in order to avoid this they will instead lend out into the real economy.

While this is still just an initial plan, and it is likely to meet some resistance from the more conservative members of the ECB, it is already having an impact on the euro. The currency moved lower by about 0.8% on the day, as represented by the CurrencyShares Euro Trust (FXE), while it has also retreated well off of its 52 week high which was hit in October. And if this ECB trend continues—in order to boost inflation—we could see further weakness out of the euro.

However, Europe is still a compelling investment destination, even with this slide in the euro currency. If anything, a slumping euro could actually boost exports and help improve trade balances across the region (See 3 European ETFs Leading the Recovery).

Still, for U.S. investors, a sliding euro hurts total returns, at least when repatriating back to dollars. For this reason, investors might want to consider a hedged euro play if they want to stay exposed to Europe, but do want to be possibly dragged down by the euro.

Fortunately, there are a handful of euro-hedged ETFs currently on the market, any of which could be excellent choices in this environment. Below, we have profiled these in a little greater depth for those who are looking for hedged European ETF exposure at this time:

WisdomTree Europe Hedged Equity Index Fund (HEDJ)

For investors seeking broad hedged exposure to Europe, HEDJ represents an interesting choice. The fund tracks the WisdomTree Europe Hedged Equity Index, charging investors 58 basis points a year in fees.

In total, the fund holds about 120 securities in its portfolio, with a relatively spread out profile. Industrials, consumer staples, consumer discretionary, and financials all account for at least 16% of assets, while none of these segments make up more than 23% of the total (see The Key to International ETF Investing).

The fund is comparable to broad European ETFs like VGK or EZU, though it strips out exposure to the euro currency. Additionally, the benchmark looks to shift more weight to exporters, so in theory, these should benefit the most from a declining euro against the dollar.

db X-trackers MSCI Europe Hedged Equity Fund (DBEU)

For another broad play on Europe without the euro, DBEU is a relatively new option. This fund follows the MSCI Europe US Dollar Hedged Index, and tracks a basket of stocks from 16 developed European countries, including both euro using and non-euro using nations, though European Monetary Union-EMU countries do dominate.

DBEU holds over 425 companies in its basket, giving it a pretty spread out holding profile across the continent. Financials do receive a large allocation here—20%-- while the rest of the top three is consumer staples (13%), and healthcare (12%).

This fund is also comparable to broad European ETFs, though more so to VGK and broad Europe ones than EMU-focused products. And much like its WisdomTree counterpart, this fund looks to outperform when the dollar is strong relatively to foreign currencies (See Deutsche Bank Launches 3 More Hedged ETFs).

db X-trackers MSCI Germany Hedged Equity Fund (DBGR)

If broad European exposure isn’t what you are aiming for, consider DBGR also from Deutsche Bank. This fund only targets Germany, holding about 55 stocks from this central European country.

And best of all, Germany is regarded by many as a pretty strong nation, while it is famous for its huge export level. Thanks to both of these factors, the nation could actually benefit from a weakened euro, as it may make its exports more competitive, so it could be a good nation to focus on.

This ETF tracks the MSCI Germany US Dollar Hedged Index to achieve this exposure, focusing on consumer discretionary, financials, and industrials for the top three sectors, giving it a pretty spread out profile.

The iShares MSCI Germany Index Fund (EWG) is pretty much the gold-standard for German ETFs right now, and it can be thought of as the unhedged competitor to DBGR. However, EWG will likely underperform when the euro is sliding, though it may outpace DBGR when the euro strengthens (See Time for This Top Ranked German ETF?).

Bottom Line

Europe appears to be in a much better position today than it was even a year ago. And with support from the ECB, this could be a hard trend to break.

However, the current crop of ECB policies could have a negative impact on the euro currency and lead to some modest losses for U.S.-based investors. In this environment, any of the aforementioned euro-hedged ETFs could be excellent plays and better choices for investors if the euro slides against the dollar, but stocks in the region hold up well otherwise.

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Author is long EWG

 
DB-XT EUR HD (DBEU): ETF Research Reports
 
DB-XT MS GER HD (DBGR): ETF Research Reports
 
ISHARS-GERMANY (EWG): ETF Research Reports
 
ISHARS-EMU IDX (EZU): ETF Research Reports
 
CRYSHS-EURO TR (FXE): ETF Research Reports
 
WISDMTR-I HE FD (HEDJ): ETF Research Reports
 
VANGD-FTSE EUR (VGK): ETF Research Reports
 
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