• Positive Outperformance – The WisdomTree Europe Hedged Equity Index had positive performance attribution in 8 out of 10 sectors. The WisdomTree Europe Hedged Equity Index was up 5.46% through 04/15/2013, compared to the MSCI EMU Local Currency Index, which returned 2.07% for the same period.
• Over-weight Consumer Staples – The WisdomTree Europe Hedged Equity Index’ largest over-weight was toward the consumer staples sector, which includes many multinational companies with large exports. At almost a 10% over-weight compared to the MSCI EMU Local Currency Index, it has contributed to 1.49% of total outperformance.
• Under-weight Financials – Noticeable under-weights of around 12.5% for the financial sector also contributed 0.37% to the total outperformance.
Hedge Your Currency Risk
WisdomTree’s focus on European exporters has started to provide important performance benefits, but we also believe there is a benefit to hedging your currency risks. As the euro weakens, European exporters benefit because their goods become more attractively priced for global consumers abroad; and when they bring the overseas sales profit back to Europe, they can convert the foreign currency at a higher exchange rate. On the other hand, a weakening euro is not good for U.S. investors in European equities—unless they hedge the currency. Currency-hedged strategies allow investors to focus on European exporters without the worry over currency declines.
Conclusion
In my opinion, many investors dismiss Europe because of its uncertain economic situation. But Europe is a big region of the world—and investors may be missing strong exporting companies that have a strong global revenue base. Focusing on these European equities with a currency hedge may help to lower the volatility of the region with stocks that are performing better than other European equities.
Jeremy Schwartz is director of research at WisdomTree Investments (NasdaqGM: WETF). This post was republished with permission from the WisdomTree blog.