Revamped Europe ETF Hedges Euro Currency Risks
September 5th 2012 at 3:07pm by Tom Lydon
With European equities depressed after their prolonged financial crisis, WisdomTree has restructured one of its exchange traded funds to offer exposure to potentially undervalued stocks in the region while hedging the currency risk of owning the euro.
According to a press release, the original WisdomTree International Hedged Equity Fund (NYSEArca: HEDJ) was restructured from its broad international strategy to a more focused European-oriented portfolio and renamed to the WisdomTree Europe Hedged Equity Fund.
The ETF has a 0.58% expense ratio and a 3.99% 30-day SEC yield.
The new HEDJ hedges the euro currency. If the euro continues to depreciate, the region’s exporters would stand to benefit, but the same companies would be negatively affected if the euro begins to strengthen.
The euro currency has strengthened from $0.83 in October 2000 to a high of $1.60 – currently, the exchange rate is at around $1.26.
According to a WisodomTree research note, European equities have outperformed during declining currency periods since 1987. Specifically, the MSCI EMU Index in local currency performed 12.8% annualized during down currency trends since Dec. 31, 1987, compared to the 7.8% returns across both up and down trends since 1987.
“Even in a declining euro environment, we believe many global companies headquartered in Europe will continue to be competitive and have the potential to generate substantial profits,” Luciano Siracusano, WisdomTree Chief Investment Strategist, said in the press release. “By providing exposure to European stocks while neutralizing the downside for U.S. investors that would be inflicted by a weakening euro, we believe HEDJ can present a precise and thoughtful alternative to un-hedged portfolios of European stocks.”
The fund has 75 holdings and the top holdings include Anheuser-Busch InBev 5.2%, Unilver 4.8%, Daimler 4.8%, Bayer 4.6% and Banco Santader 4.4%.
Sector allocations include consumer staples 22.1%, consumer discretionary 19.4%, industrials 15.3%, health care 12.3%, materials 9.0%, information technology 8.7%, financials 7.9%, energy 2.9% and telecom services.
Country allocations include Germany 25.0%, France 24.3%, Netherlands 18.8%, Spain 8.7%, Belgium 7.9%, Finland 7.0%, Italy 4.2%, Portugal 3.1%, Austria 0.5% and Ireland 0.5%.
European Central Bank President Mario Draghi has proposed a “Monetary Outright Transactions” plan that would engage in unlimited purchases of government debt but will simultaneously remove the money equivalent from elsewhere in the system to assuage concerns about printing excess money, Bloomberg reports.
“For the moment, the focus really is on the word ‘unlimited,’ which, if indeed affirmed by Draghi at tomorrow’s meeting, would constitute a new step in the ECB’s rhetoric,” Thomas Costerg, an economist at Standard Chartered Bank, said in the article. That would “send a powerful signal to the market.”
For more information on the Eurozone, visit our Europe category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.