Hedged European ETFs in Focus: Best Choice for Europe Now?

Mario Draghi finally announced his long awaited action plan to spur growth in the slumping Euro zone. The European Central Bank (:ECB) cut its ultra-low interest rates even further and said that it will buy asset-backed securities and euro-denominated covered bonds from October to boost growth and inflation.

Among the latest measures, ECB cut its main refinancing rate to another historic low of 0.05% from 0.15% and drove the deposit rate paid by the ECB to banks for parking funds with it overnight further into negative territory at – 0.20% (read: 3 European ETFs Worth Considering on ECB Measures).

Though the rate cut was unexpected, Draghi did signal previously that he would sooner announce some kind of asset buyback program if the deflationary environment in the Euro zone worsens. Nonetheless, the buyback program will ease credit lending and significantly stir the size of ECB’s balance sheet.

Market Reaction

While European equity markets cheered the move and climbed to new records, the news wasn’t received well by the continent’s currency market and led the euro to register its biggest single-day decline since 2011 on September 4 against the greenback. In fact, the fresh round of stimulus caused the euro to close the week ended Sep 5 on the longest weekly losing streak in its 15-year history, as per a Bloomberg report.

CurrencyShares Euro Trust (FXE), which tracks the movement of the euro against the U.S. dollar, also retreated following the step and is currently hovering near its 52-week low (read: Short the Euro with These Inverse ETFs).

Should you Play the Hedged Way?

If the expansionary monetary policy by the ECB indeed succeeds in fuelling growth in the ailing economy, European stocks might have great days ahead and might even continue to climb higher. Moreover, a slumping currency could actually boost exports and help improve the region’s trade balances.

However, a weak currency would hurt total returns for U.S. investors, at least when repatriating back to dollars. For this reason, investors wanting to play the European equity space, but wanting not to be let down by the euro, might be better off considering a hedged euro play.

For those keen on playing the space in a safe way, there are a handful of euro-hedged ETFs currently on the market, which could be excellent plays following the ECB action. Below we have highlighted these in greater detail for those looking for a hedged European ETF exposure.

WisdomTree Europe Hedged Equity Index Fund (HEDJ)

HEDJ is an interesting choice for investors seeking a hedged exposure to Europe. The fund tracks the WisdomTree Europe Hedged Equity Index holding a basket of 124 stocks. The fund primarily includes stocks of European companies generating significant revenues from exports (see: all the European ETFs here).

The fund definitely has some concentration risk as the top 10 holdings form 45% of total fund assets. However, it is pretty well spread across a number of sectors with consumer staples, industrials, consumer discretionary, financials and health care taking double-digit exposure.

Country-wise, Germany and France take the top two spots with roughly half the fund allocation, followed by Spain and the Netherlands. HEDJ is the most popular choice in the European space with an asset base of $2.4 billion and an average trading volume of 530,000 shares. Expense ratio came in at 0.56%.

The fund has easily beaten its unhedged counterparts – the broad European ETFs like (VGK) or (EZU) – returning 7.2%. Also, if the euro continues with its losing spree, the fund could be an excellent choice for dollar denominated investors.

db X-trackers MSCI Europe Hedged Equity Fund (DBEU)

For another broad play on the hedged European space, DBEU can be a good bet. The fund tracks the Deutsche X-trackers MSCI Europe Hedged Equity ETF and provides exposure to 16 developed European stock markets without the euro effect.

With this focus, the fund holds a basket of 438 stocks and is quite well spread out among its individual holdings. Financials and consumer staples receive a large exposure with a combined allocation of 40%, while the rest of the sectors have single-digit exposure.

The fund is also comparable to the broad European ETFs and has easily outperformed them, returning 6% so far led by a relatively strong dollar (read: 2 Great European ETFs to Buy in an Uncertain Market).

db X-trackers MSCI Germany Hedged Equity Fund (DBGR)

Investors keen to play only the German equity space in a hedged way can consider DBGR. This fund solely targets Germany, holding about 55 stocks from this central European country and charging 45 basis points as expenses.

The fund tracks the MSCI Germany US Dollar Hedged Index, with Bayer, Siemens and BASF as the top three holdings. Sector-wise, materials occupy the top spot with 24% allocation, followed by 19.8% to consumer discretionary and 16.9% to financials.

The fund has given flat returns this year and currently carries a Zacks Rank #1 or Strong Buy Rating.

Thus, if the euro continues to slide further but stocks in the region hold up, any of the above mentioned euro-hedged ETFs could be excellent plays for investors.

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