Time to Buy The Hedged European ETF? - ETF News And Commentary
May 07 2013 - 11:04AM
Zacks
While the crisis in Europe may be reaching a lull, investors
aren’t as optimistic about the currency markets. Recent policy
decisions by the ECB and comments by Mario Draghi haven’t exactly
been favorable to the euro, and now some are expecting some near
term volatility for the common currency.
After all, the ECB recently slashed their benchmark rate by 25
basis points with some expecting more cuts in the future as well.
Draghi pretty much confirmed this when he said earlier in the week
that ‘we are ready to act again’ and that ‘monetary policy will
remain accommodative’.
After this news, the euro slumped a bit against the dollar
although it is clinging to the 1.30 mark right now. But if we see
more cuts or other more ‘innovative’ measures that add to the
balance sheet but attempt to stimulate the economy, we could see
the euro fall further against the greenback in the weeks ahead (see
3 ETF Strategies for the Second Quarter).
Equity Angle for Europe
If the euro does slump against the dollar, it presents an
interesting situation for investors who want to buy up European
securities. While stocks in Europe haven’t been that bad to start
2013, an unfavorable currency impact could dull these returns for
American investors.
That is because for euro-denominated investments, a sluggish
dollar will curtail any U.S. dollar-based returns. In other words,
even a correct call on a particular European ETF could be marred by
a poor currency translation, so this aspect definitely needs to be
taken into account.
This is especially true given the recent surge in many European
ETFs over the past month. Broad funds like VGK and
EZU have performed quite well in this time frame,
so perception about European equities may be shifting, although the
currency isn’t.
How to Avoid
Fortunately, the advent of ETFs has led to some currency hedged
ETF options. These funds help investors to strip out the currency
exposure so U.S. investors don’t have to worry about the negative
impact from a foreign currency. While these are also likely to
underperform when the dollar is weakening, they have found a niche
among certain types of investors.
We have definitely seen this so far in the case of Japan ETFs,
and particularly over the past six months. WisdomTree’s DXJ, which
hedges out yen exposure, has performed admirably when compared to
its unhedged cousin, EWJ, adding over 50% compared to EWJ’s still
respectable 30% gain (meanwhile the yen fell by about 20% over the
same time frame).
While most analysts aren’t forecasting such an incredible drop
in the euro against the dollar, it does showcase that hedging out
currency exposure can make a big difference in a particular market.
So for investors who want to apply a similar technique to Europe,
it may be time to consider the Europe Hedged Equity Index
Fund (HEDJ).
Hedged Equity ETF in Focus
This ETF looks to track a broad benchmark of European equities
while stripping out euro exposure. The fund does charge 58 basis
points a year so investors do have to pay a bit more for the
hedging when compared to ‘regular’ ETFs like VGK
or EZU.
The fund is also a bit less liquid than those competitors, as
roughly 50,000 shares move hands in a normal day. The product is
relatively popular though, as more than a quarter billion is
invested in the fund, making it one of the more popular hedged
products in the market today (read Currency Hedged ETFs: Top
International Picks?).
It is also worth noting that the product will invest in a broad
basket of stocks from across the euro region with a focus on
German, French, and Dutch companies. Additionally, it will tilt
towards exporters so it could be better positioned than most to
benefit from a slide in the value of the euro against the
dollar.
![](http://staticzacks.net/images/zacks/blogs/1367950356_scaled_425.jpg)
Bottom Line
While European ETF investing is still dicey, it is clear that
the ECB is going to throw everything they can at the problem. This
could support asset prices in some parts of the region, but it also
might result in a slide against the dollar for the common currency
(see Volatility Hits Euro ETF after Draghi Comments).
So if investors are seeking to play the stock story in Europe
without worrying about a euro slide, consider HEDJ for exposure.
The fund looks to eliminate worries from a euro slump and allow
investors to take advantage of a broad boost in sentiment about the
region, at least in the short term.
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WISDMTR-J HEF (DXJ): Free Stock Analysis Report
ISHARS-JAPAN (EWJ): Get Free Report
ISHARS-EMU IDX (EZU): Free Stock Analysis Report
CRYSHS-EURO TR (FXE): Free Stock Analysis Report
WISDMTR-I HE FD (HEDJ): Get Free Report
VANGD-FTSE EUR (VGK): Free Stock Analysis Report
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