When evaluating European equities, advisors and investors should consider the advantages of hedged euro approach, which can help diminish risks associated with the common currency.
On the recent webcast, European Growth with Currency Protection ETF, Luke Oliver, Head of Capital Markets and Passive Investments at Deutsche Asset and Wealth management, Dodd Kittsley, Head of ETF National Accounts & Strategy at Deutsche Asset and Wealth Management, and Scott Kubie, Chief Investment Strategist at CLS Investments, discussed the opportunities in the Eurozone economy and how a fluctuating euro currency can affect returns.
“Historic trends in the U.S. Dollar can tell a clear story of currency fluctuation and cyclical trends,” Oliver said. “Each currency changes according to its own set of factors and cycles.”
With the European Central Bank adhering to a loose monetary policy, the euro currency is more at risk of depreciating against the U.S. dollar. Consequently, investors who are bullish on the Eurozone economy may be up against a bearish euro currency outlook – foreign investment returns are usually denominated in their local currency, so a weakening euro currency translates to lower U.S. dollar-denominated returns.
In the U.S., the Federal Reserve is more likely to hike rates before the ECB, potentially strengthening the U.S. dollar against a basket of foreign currencies.
Oliver points out that since 1968, the average U.S. dollar peak and trough appears approximately every eight years. The current cycle is in its 12th year, with the U.S. Dollar Index near all-time lows.
Meanwhile, European equities are looking attractive relative to U.S. stocks. The MSCI Europe Index shows cheaper valuations based on the price-to-earnings and book-to-price ratios. [Guard Against Euro Volatility With This ETF]
“We think Europe has large opportunities for strong earnings growth,” Kubie said.
Consequently, investors can consider investment strategies like the db X-Trackers MSCI Europe Hedged Equity Fund (NYSEArca: DBEU), which provides exposure to European markets while hedging against a depreciating currency. DBEU tracks 16 developed European stock markets, including Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.
DBEU debuted in October 2013 and has already attracted $191 million in assets under management. DBEU and other Europe-related ETFs could continue to gain assets as many investors are still looking into the market. On a survey of financial advisors conducted by ETF Trends and RIA Database, the majority of respondents revealed that they are still researching the investment idea before jumping in.
For more information on Europe, visit our Europe category.
Financial advisors who are interested in learning more about hedging currency risk with European equity exposure can view the webcast on demand.