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Health of Euro Zone Recovers: ETFs to Watch

The Euro zone is showing signs of a speedy recovery as evident from the four-and-a-half year high expansion in its business activity for the month of November. According to a flash estimate by data firm Markit, the Euro zone purchasing managers’ index inched up to 54.4 this month from 53.9 in October. This surpassed the threshold score of 50 which hints at an expansion in activity.

The growth profile weakened in recent times in the Euro zone, failing rounds of monetary easing. The bloc recorded 0.3% growth in Q3, declining from a 0.4% rise in Q2 and falling short of market expectation. The growth rate in Q3 was the softest in a year as development cooled down in the Euro zone’s heavy weights Germany and Italy.

In such a backdrop, the news of fast expanding business activity spread optimism among investors. New business growth was noticed in both service and manufacturing sectors. Germany turned up a super performer as companies experienced ‘their strongest monthly gains in new business orders for two years’.

The boost has come at an opportune moment when the ECB is mulling over further easing in policies to boost inflation and economic growth.  The European Central Bank (ECB) president Mario Draghi reassured of a more intensified and protracted QE measure, if need be. He reaffirmed the evaluation of the monetary policy by the end of this year based on a volley of economic data.

However, the latest upbeat data raises confusion over the ECB’s potential altruism in the December meeting forcing some to believe that further easing may not be as generous as thought previously. But a stubbornly low inflation profile thanks to the commodity market rout gives all reasons to expect further monetary easing from the ECB.

Overall, the chief economist at Markit indicated that the Euro zone was “on course for one of its best quarterly performances over the past four-and-a-half years.” Based on this data, he expects the Euro bloc to post 0.4% economic growth in the final quarter of the year. Meanwhile, Greece received a bailout loan from the Euro-area member states as the former agreed to enact the stated austerity measures.

ETFs to Watch

Below we highlight three European ETFs that could be tapped to play the latest uptick in business sentiments. To do this, we land up on currency-hedged ETFs as this is the most-watched investing technique currently thanks to opposing monetary policies in the U.S. and the Euro zone. While the greenback is strengthening on a looming rate hike in the U.S., euro is sliding on accommodative policies by the ECB (read: Guide to Currency Hedging ETFs).

WisdomTree Germany Hedged Equity Fund (DXGE)

Since Germany was the main driver of the latest surge in business activity, Germany ETFs warrant a look. This German ETF holds 75 securities in its basket. It has a slight tilt toward the consumer discretionary sector with 21.7% share, followed by double-digit exposure each in financials, industrials, materials, and healthcare.

It has managed assets worth $286 million and trades in good volume of 165,000 shares a day on average. The fund charges 48 bps in annual fees and is up 9.6% so far this year (as of November 23, 2015). DXGE has a Zacks ETF Rank of 2 with a Medium risk outlook (read: 3 European ETFs Rebounding Sharply).

WisdomTree Europe Hedged Equity Index Fund (HEDJ)
 
This fund can be viewed as a replica of the broad-based European growth. The fund appears rich with AUM of nearly $21.3 billion. Expense ratio comes in at 0.58%. Holding 130 securities in its basket, the product is pretty well spread out across components with no firm making up for more than 6.19% of assets. Consumer staples, industrial, consumer discretionary, financials and healthcare has double-digit weight each in the fund (read: 11 Most Popular Currency Hedged ETFs).

In terms of country allocations, Germany and France are leading with 26.1% and 24.2% share, respectively, followed by the Netherlands (17.2%) and Spain (16.5%). The Zacks Rank #3 (Hold) fund is up 11.2% so far this year (as of November 23, 2015).
 
Europe Hedged SmallCap Equity Fund (EUSC)
 
Since small-caps companies tend to pick up more when an economy improves, a look at the small-cap European companies seems justified. The fund provides exposure to close to 237 of the smallest European companies. This ETF has amassed about $245.7 million.
 
The product is highly diversified with no stock accounting for more than 2.06% of the portfolio. Sector wise, industrials gets the maximum exposure with 25.9% of the portfolio. Financials and consumer discretionary also get double-digit allocation each, while energy gets the least exposure with only 2.35% of the basket (see: all the European ETFs here).
 
As far as country exposure is concerned, Italy (21.1%), Germany (17.2%), France (16.4%) and Finland (13.1%) get top priorities. The fund charges 58 bps in fees and is up about 1.6% so far this year.
 
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WISDMTR-GER HEF (DXGE): ETF Research Reports
 
WISDMTR-I HE FD (HEDJ): ETF Research Reports
 
WISDMTR-EUR HSC (EUSC): ETF Research Reports
 
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