The European Central Bank meets today and while it is widely expected the ECB will not provide much in the way of surprises, it is also widely believed the euro is overvalued. A strong euro has been bemoaned by export-dependent nations such as Germany, the Eurozone’s largest economy, which is also contending with a weak yen.
Although it is not expected that ECB President Mario Draghi will announce an interest rate reduction, forward guidance and a commitment to keeping rates low for the foreseeable future, at a minimum, could be important comments for some ETFs.
“When the central bank last met in August, Draghi acknowledged improvements in the economy that ‘tentatively confirm the expectation of a stabilization in economic activity.’ The euro rallied in reaction but the gains did not last long as Draghi’s warning that even if the economy improves, ‘money-market prices signaling rate rises are unwarranted’ rang in the back of everyone’s mind,” wrote Kathy Lien of BK Asset Management.
Should Draghi give euro bears something to cheer about, the WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ) could be one ETF that benefits. Currency hedged ETFs have risen to prominence this year as advisors and investors are paying increased attention to the adverse impact foreign currency fluctuations can have on portfolios. However, the bulk of the hedged currency ETF fanfare has been paid to yen-related funds such as the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ). [International ETFs Minus Currency Risk]
Referring to HEDJ as the euro equivalent of DXJ is not entirely off base, but HEDJ has shown it does not always need the euro to fall to deliver upside for investors. In fact, the CurrencyShares Euro Trust (NYSEArca: FXE) is flat year-to-date, but HEDJ has risen 5.6%. [An ETF for the ECB’s Loose Monetary Policies]
Likewise, a falling euro does not guarantee HEDJ will rise. Over the past month, FXE is lower by 0.4%, but HEDJ is off nearly 2%.