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A Better Way To Profit From Germany ETFs

ETF Professor

German equities are sagging this year as the export-driven economy feels a pinch from the stronger U.S. dollar. The MSCI Germany Index is lower by about 6 percent year-to-date.

Some exchange traded funds offer better strong dollar avenues for accessing stocks in Germany, the Eurozone's largest economy. Consider the WisdomTree Germany Hedged Equity Fund (NASDAQ: DXGE).

What To Know

DXGE, which tracks the WisdomTree Germany Hedged Equity Index, is performing less poorly than unhedged German rivals this year. The WisdomTree ETF has been about 200 basis points less bad than the MSCI Germany Index, indicating the fund's dollar hedge feature is working.

DXGE can potentially ameliorate some of the issues vexing investors when it comes to European stocks in a strong dollar environment because the ETF “owns only German equities and hedges euro exposure. It allows investors to shift their European allocations in the direction of one of the continent’s more stable “core” countries, while minimizing exposure to “peripheral” allocations and mitigating the volatility of the euro versus the dollar,” according to WisdomTree.

Why It's Important

Germany's economy leans heavily on exports, financial markets there vulnerable to a weaker euro. The MSCI Germany Index reflects as much, allocating 17.27 percent of its weight to consumer discretionary stocks and another 13.81 percent to the industrial sectors, two sectors that, in Germany, are export-driven.

DXGE allocates about 40 percent of its combined weight to those two sectors, but has managed to outperform the MSCI Germany Index this year because the WisdomTree fund hedges currency risk. There's also an element of political risk to consider with Germany ETFs as Prime Minister Angela Merkel's Christian Democrats (CDU) party sees its relationship with the Christian Social Union (CSU) become increasingly strained.

“The crisis came to a head this spring when the CSU pondered the prospect of losing votes in Bavaria’s upcoming October elections to the right-wing anti-immigration Alternativ für Deutschland (AfD),” said WisdomTree. “Amid that fear, Horst Seehofer, the CSU’s interior minister, shifted rightward to fend off AfD’s rise. His proposal to stop asylum seekers from entering Germany caused ructions with German Chancellor Merkel, who wanted to maintain the status quo. To save her government, Merkel recently agreed to build border camps for asylum seekers.”

What's Next

There's a valuation and earnings growth case for Germany. The MSCI Germany Index trades at a significant discount to the S&P 500 and earnings growth there is expected to be solid over the next couple of years. Earnings-per-share growth in Germany from 2017 through 2020 is expected to reach 30.1 percent, according to WisdomTree.

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