The CurrencyShares Euro Trust (NYSEArca: FXE) is trading slightly lower Thursday after the European Central Bank did a whole lot of nothing following its policy meeting.
Still, ECB President Mario Draghi gave arguably his strongest hint to date that the ECB will engage in Federal Reserve-style bond purchases in an effort to shore up the Eurozone economy. FXE is up more than 6% over the past year, confirmation that the euro has remained stubbornly strong at a time when European exporters could benefit from a weaker currency. [Central Banks Could Affect High-Flying Euro]
Despite the euro’s strength, the WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ), the European equivalent of the wildly popular WisdomTree Europe Hedged Equity Fund (NYSEArca: DXJ), is higher by nearly 4% this year. In fairness, that performance lags those turned by other well-known, diversified Europe ETFs that do not hedge currency exposure. And to be fair, HEDJ hit an all-time high Thursday.
But with the ECB hinting that quantitative easing may not be too far off, the utility of HEDJ and its hedged euro component increase. Some investors are already making that bet. Quiet as it has been kept, HEDJ recently entered the $1 billion in assets under management club, $1.06 billion to be precise, as the ETF has raked in $394.5 million in new assets this year. [A Europe ETF for Q2]
As a dedicated Eurozone ETF, HEDJ excludes Switzerland and the U.K. from its country lineup. As European stocks have recovered, along with German equities, the U.K. and Swiss stocks have been leaders. The lack of exposure to the U.K. and Switzerland has hampered HEDJ somewhat over the past two years, but the ETF has actually been noticeably less volatile than unhedged diversified Europe ETFs with heavy U.K. and Switzerland exposure.
With stocks in those two countries looking pricey relative to peripheral Europe. Many analysts predict that the European profit cycle still has room to expand, with European indices focused on small-caps still posting earnings about 60% below previous peaks, according to WisdomTree research. [Europe ETFs Pause, but Can Rise Again]
HEDJ’s lack of U.K. and Switzerland does not mean increased risk. Germany is the largest country weight at 26.2%, followed by France at almost 23%. Last month, Societe Generale said it expects most European equity markets to be flat by the end of this year, but the bank did say it prefers France and Italy to the U.K., Germany and Switzerland. The bank is forecasting upside for the CAC 40 that is about 10% above current levels. [Embracing the France ETF]
Spain is the largest PIIGS allocation within HEDJ at 17.3%. The Netherlands is HEDJ’s third-largest country weight at 17.4%, not a bad thing when the iShares MSCI Netherlands ETF (NYSEArca: EWN) is up 5% in the past month.
Noteworthy is that the WisdomTree Europe Hedged Equity Index, HEDJ’s underlying index, appeared in July 2012 and neither the index nor the ETF have operated in a period of sustained euro weakness. FXE is up 9% since September 2012, the first full month of HEDJ being accessible in its current form. The ETF has still returned 36% since then while being less volatile than its unhedged rivals.
WisdomTree Europe Hedged Equity Fund
Tom Lydon’s clients own shares of HEDJ.