After several years of lagging the United States and other major developed markets, European stocks and the related exchange-traded funds look to be awakening from that slumber. With investors clamoring for value plays outside the United States, the resurgence of Europe ETFs is looking well-timed.
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The SPDR EURO STOXX 50 ETF (FEZ) and the iShares MSCI Eurozone ETF (EZU) are each up 9 percent year-to-date, indicating investors are enthusiastic about the prospects of a legitimate economic and equity market recovery in the eurozone. Both ETFs are heavily allocated to Germany and France, the eurozone's two largest economies.
Recent fund flow statistics suggest investors are increasingly looking to invest in the eurozone via U.S.-listed exchange-traded funds (ETFs), despite political risk factors related to upcoming Brexit negotiations and key elections in France and Germany, said CFRA Research in a note out Wednesday.
Although the CurrencyShares Euro ETF (FXE) is up 2.5 percent this year and the dollar is slumping against other major currencies, data indicate investors are embracing currency hedged Eurozone ETFs. Those funds usually rise when the euro weakens against the dollar. Even with the common currency trading higher, the WisdomTree Europe Hedged Equity ETF (HEDJ) is higher by almost 9 percent this year.
Honing Into HEDJ
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Over the years, HEDJ has risen to prominence as one of the premier alternatives for investors looking for eurozone exposure with protection from the euro's gyrations against the dollar.
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. Plus, HEDJ components are currently sporting attractive valuations.
HEDJ's exposure is higher to Spain (19 percent of assets) and Netherlands (17 percent) than the two previously-highlighted ETFs, though Germany (26 percent) and France (24 percent) are still the largest country exposures, said CFRA. In addition to hedging exposure to fluctuations between the U.S. dollar and the euro, HEDJ holds companies that derive at least 50 percent of revenues from countries outside of Europe and weighted based on annual cash dividends. HEDJ has shed approximately $715 million of assets in 2017.
CFRA has Market-Weight ratings on EZU and HEDJ and an Overweight rating on FEZ.
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