Shorting the Euro: Not 2013’s Best Idea

December 12th at 9:00am by Tom Lydon

At the start of 2013, if one surveyed a group currency strategists and traders and asked that group to pick a developed market currency most likely to decline, after the yen, chances are the euro would have been the pick.

Looking back, it is easy to understand. The Eurozone was still grappling with the effects of the region’s sovereign debt crisis, and heading into this year, it seemed to be just a matter of time before at least one country was expelled from the common currency regime. But with the end of 2013 in sight, the CurrencyShares Euro Trust (NYSEArca: FXE) is up 4.1%.

FXE has turned in that solid showing while the equivalent British pound ETF has eked out small gain and the comparable dollar index, Canadian and Australian dollar ETFs have declined. [Euro Becomes Safe-Haven Currency]

By some accounts, the euro is overvalued, but when it comes to stocks and equity-based Europe ETFs, to which countries the euro is overvalued is what really matters.

“German exports sent outside the eurozone are billed in US dollars, but the companies have to pay their bills in euros, meaning they are buying euros in large quantities. Since the euro is undervalued for the German economy and overvalued for France, Spain, Italy and others, this has the effect of giving Germany a further competitive advantage against its neighbors,” writes Michael Ide for ValueWalk.

Indeed, the unhedged iShares MSCI Germany ETF (NYSEArca: EWG) and Market Vectors Germany Small-Cap (NYSEArca: GERJ) are both among this year’s 10 best single-country Europe ETFs. [2013's Best Single-Country Europe ETFs]

So is the iShares MSCI Spain ETF (NYSEArca: EWP) and it is worth noting Goldman Sachs recently sound a bullish tone on Spanish equities for long-term investors. [A 2014 Game Plan for Europe ETFs]

Despite data that affirm the euro is overvalued to French, Italian and Spanish exporters and consumers, that scenario is not weighing on diversified Europe ETFs with significant exposure to those countries. For example, the SPDR EURO STOXX 50 Fund (NYSEArca: FEZ), which is one of this year’s top-performing diversified Europe ETFs, allocates almost 56% of its weight to France, Spain and Italy and has still managed an 18.1% gain. [Settling the Large-Cap Europe ETF Debate]

However, in single-country ETF terms, only EWP has outpaced EWG while the equivalent France and Italy funds have lagged the largest Germany ETF.

Hedge currency Europe ETFs have been solid though not spectacular performers this year. The db X-trackers MSCI Germany Hedged Equity Fund (NYSEArca: DBGR) is higher by 6.3% while the WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ), which is heavily tilted toward Germany, France and the Netherlands, is up 13.4%.

CurrencyShares Euro Trust

ETF Trends editorial team contributed to this post.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. 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.