The European Central Bank meets today and while it is widely expected the ECB will not provide much in the way of surprises, it is also widely believed the euro is overvalued. A strong euro has been bemoaned by export-dependent nations such as Germany, the Eurozone’s largest economy, which is also contending with a weak yen.
Although it is not expected that ECB President Mario Draghi will announce an interest rate reduction, forward guidance and a commitment to keeping rates low for the foreseeable future, at a minimum, could be important comments for some ETFs.
“When the central bank last met in August, Draghi acknowledged improvements in the economy that ‘tentatively confirm the expectation of a stabilization in economic activity.’ The euro rallied in reaction but the gains did not last long as Draghi’s warning that even if the economy improves, ‘money-market prices signaling rate rises are unwarranted’ rang in the back of everyone’s mind,” wrote Kathy Lien of BK Asset Management.
Should Draghi give euro bears something to cheer about, the WisdomTree Europe Hedged Equity Fund (HEDJ) could be one ETF that benefits. Currency hedged ETFs have risen to prominence this year as advisors and investors are paying increased attention to the adverse impact foreign currency fluctuations can have on portfolios. However, the bulk of the hedged currency ETF fanfare has been paid to yen-related funds such as the WisdomTree Japan Hedged Equity Fund (DXJ). [International ETFs Minus Currency Risk]
Referring to HEDJ as the euro equivalent of DXJ is not entirely off base, but HEDJ has shown it does not always need the euro to fall to deliver upside for investors. In fact, the CurrencyShares Euro Trust (FXE) is flat year-to-date, but HEDJ has risen 5.6%. [An ETF for the ECB's Loose Monetary Policies]
Likewise, a falling euro does not guarantee HEDJ will rise. Over the past month, FXE is lower by 0.4%, but HEDJ is off nearly 2%.
Given that HEDJ does not always move in lockstep with the ETF’s country and sector weights take on some added significance in advance of and after the ECB meeting. Markets would like to see the ECB follow the Federal Reserve and Bank of England by either announcing a time line for future rate increases or tying such action to marquee economic data, such as unemployment rates.
Draghi’s failure to do that today could spook investors in the near-term, but that could create a buying opportunity in HEDJ. France is the ETF’s largest country weight at 24.7%, but mix of conservative and Eurozone economies in the next three country allocations is something to note. Germany and the Netherlands, a pleasant surprise among single-country Europe ETFs in recent months, combine for over 42% of the fund’s weight. Spain is next at nearly 15%.
Even if riskier sectors like financial services lead a legitimate rally in European stocks, HEDJ’s exposure to export-driven sectors position the ETF to benefit from an ongoing global recovery. Industrials, staples and discretionary names combine for 59% of the fund’s weight.
WisdomTree Europe Hedged Equity Fund
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of DXJ.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
- Mario Draghi