Europe ETFs Could Be Ready To Shine

European stocks are in the midst of a lengthy stretch, nearly a decade to be precise, of lagging their U.S. counterparts. Additionally, with national elections looming this year in several of the eurozone's largest economies, investors might be in for some political volatility across the pond.

Those might be reasons to avoid European equities and exchange-traded funds such as the WisdomTree Europe Hedged Eq Fund HEDJ, but those concerns could be giving way to a credible contrarian opportunity with eurozone stocks.

Let's Look At HEDJ

For its part, HEDJ is already performing well. Year-to-date, the ETF is higher by nearly 1.5 percent, bringing its 12-month gain to almost 24 percent. A gain of almost 1 percent yesterday brought the currency hedged ETF to within 0.85 percent of its 52-week high.

Data suggest eurozone economies are strengthening, which could translate to more good news for ETFs like HEDJ.

“Over the last quarter, we’ve started to see a meaningful rebound in economic data from the eurozone in the form of increasing PMIs and a modest uptick in euro area capital spending. While no one is ready to claim that Europe’s troubles have been resolved, the early signs in the data are encouraging. In response, we’ve also seen a meaningful rebound in cyclical sectors like Industrials and businesses linked to the consumer,” said WisdomTree in a note out Thursday.

Methodology And Strategy

HEDJ allocates over 37 percent of its weight to industrial and consumer discretionary names, two of the eurozone's more export-driven sector. That jibes with HEDJ's methodology, which includes a tilt toward exporters that benefit from a weak euro.

Data suggest HEDJ's methodology works. Over the past three years, not only has HEDJ been slightly less volatile than the MSCI EMU Index, the WisdomTree ETF has outperformed that index by an almost 20-to-1 margin. That serves as a reminder of the unintended consequences of investors not acknowledging currency risk.

Germany and France, the eurozone's two-largest economies and both of which hold national elections this year, combine for over 50 percent of HEDJ's geographic weight. The ETF is lightly allocated to troubled Italy and still fragile Portugal as the countries combine for just 2 percent.

“In sum, we believe that Europe currently presents an opportunity for investors. While risks remain, we believe that the market may be overly pessimistic about the likelihood of political dysfunction. In our base case for 2017, we believe U.S. rates will continue to rise on the back of a rebound in global growth. Should the current relationship between Europe and U.S. rates hold, this could present an opportunity in the medium term for European equities,” added WisdomTree.