Stock market volatility has returned to a higher level this year and the market has delivered negligible gains through February 9.
Much of that fall, in my opinion, is due to the stronger US dollar and a panic selloff in oil and energy stocks.
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While large U.S. companies, dependent on exports, have suffered declining revenues and earnings, their European counterparts are doing well.
Much of this divergence is directly attributable to currency exchange rates. A stronger dollar makes our goods more expensive to the rest of the world. A weaker euro is lowering prices for European exports.
While a strong dollar lowers the price of oil and other commodities, it also works to lower demand for our manufactured products and eventually squeeze revenues and profit margins for US companies.
We believe that for the foreseeable future these currency trends will continue to hinder US markets while boosting the Euro bloc.
Comparing year-to-date performance of the S&P 500 to the Euro Stoxx 600 index demonstrates the difference in market reactions to the current state of economic affairs.
While the US market is still down for the year, the broad European index is up approximately 8% as of early February.
In my opinion, the Wisdom Tree Europe Hedged Equity ETF is a sophisticated way to cash in on the export advantage of large European companies.
It is composed of European-based companies which generate one half or more of their revenues from sales outside of Europe and pay a sustainable dividend.
More importantly, the currency effect is hedged out of the investment results. That hedge is necessary. Without it we could not take advantage of the continuing QE fueled rally in European stocks.
Because of that hedge the return on the Wisdom Tree ETF is keeping pace with the STOXX and is up roughly 9% this year as of February 9.
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The post Here’s my hedging strategy for the mighty dollar appeared first on Smarter InvestingCovestor Ltd. is a registered investment advisor. Covestor licenses investment strategies from its Model Managers to establish investment models. The commentary here is provided as general and impersonal information and should not be construed as recommendations or advice. Information from Model Managers and third-party sources deemed to be reliable but not guaranteed. Past performance is no guarantee of future results. Transaction histories for Covestor models available upon request. Additional important disclosures available at http://site.covestor.com/help/disclosures.