Europe equity and stock exchange traded fund investors should keep in mind currency risks, especially with diverging monetary policies from the Federal Reserve and European Central Bank.
On the recent webcast, Seeking Growth in Europe with Currency Protection, Daniel Brehon, Forex Strategist at Deutsche Bank, points out that the U.S. dollar is beginning to form a broad uptrend after reversing its 2011 low and can continue to strengthen as the Fed tightens rates, especially as the economy improves.
On the other hand, the ECB is looking at lower rates and potentially enacting a quantitative easing program of its own to combat the stubbornly low inflation level and kick-start a faltering economy. Consequently, Brehon argues that traders should be short the euro.
“The case for more ECB easing is huge,” Brehon said.
Michael Jones, chairman and chief investment officer at RiverFront Investment Group, believes that that an ECB quantitative easing program could help promote an equity rally similar to what the Fed’s bond buying actions have done for the U.S. markets.
The more aggressive actions by the ECB has attracted investors’ attention. According to a recent survey, a number of financial advisors have looked into more European exposure this year.
However, a depreciating euro currency could weigh on overall returns. Europe investments are denominated in the euro, and a weaker EUR translates to a smaller USD-denominated return. The euro has declined 6.2% against the U.S. dollar so far this year and now trades around $1.29.
Kize Behrends, ETF Investment Specialist at Deutsche Bank for the Midwest Region, explained that with a Europe hedged-equity ETF, the Deutsche X-Trackers MSCI Europe Hedged Equity ETF (NYSEArca: DBEU), investors can access the stock markets of 16 European countries with diminished currency risk. DBEU includes currency forwards to hedge against a group of European currencies.
The ETF includes broad Europe exposure, with securities from Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. Non-Eurozone members, the U.K. and Switzerland, make up 41.8% of the ETF’s portfolio.
In the ETF space, the hedged-equity strategy is relatively new. Some financial advisors have warmed up to the strategy, but further education will be required to help bring these types of investments to a broader audience.
Financial advisors who are interested in learning more about a Europe hedge-equity strategy can listen to the webcast here on demand.