Getting Reacquainted With An Old Europe ETF Friend

For a significant portion of 2016, the euro vexed investors, rising in spite of the European Central Bank's (ECB) best efforts to weaken the common currency. Over that span, the Guggenheim CurrencyShares Euro Trust FXE was, surprisingly to some, one of the better-performing currency exchange-traded funds.

That has gone by the wayside and with a recent slide, FXE is down half a percent year-to-date. What is good news for euro bears is also good news for currency hedged ETFs, a once hot group that has been maligned for much of this year as the dollar has disappointed. Well, here it is late October and the WisdomTree Europe Hedged Eq Fund HEDJ is up 4.5 percent year-to-date.

Significance

That is significant for a number of reasons, not the least of which is the fact that in arguably quiet fashion, HEDJ is once again throttling its unhedged counterparts. For example, the largest unhedged eurozone ETF and the Vanguard FTSE Europe ETF VGK, which is not a dedicated eurozone fund, are off an average of one percent year-to-date and those ETFs have been an average of 150 basis points more volatile than HEDJ this year.

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With the euro faltering, HEDJ's tilt toward exporters is again paying dividends for investors.

“It’s also worth noting that many have been pleasantly surprised that markets have recovered from the lows they hit a few days after the surprise Brexit result. Since that point, the WisdomTree Europe Hedged Equity Index is up more than 13 percent, also outperforming these other benchmarks (MSCI EMU Index: up 12.3 percent; Euro Stoxx 50 Index: up 11.6 percent),” said WisdomTree in a recent note.

Methodology

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.

Additionally, as has been previously noted, HEDJ allocates just 13.1 percent of its weight to financial services stocks. That makes the sector the ETF's fourth-largest sector exposure, an advantage at a time when global investors are increasingly concerned about the strength of banks throughout some major eurozone economies.

“Deutsche Bank, currently much maligned in the media, does not qualify as an exporter. Unicredit, Intesa Sanpaolo — these are also not exporters. In Europe at present, Financials are under stress, but for the most part companies in this sector do most of their business domestically, thereby not qualifying for the WisdomTree Europe Hedged Equity Index,” added WisdomTree.

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