Once European economies turn around, investors could utilize a hedged-equity exchange traded fund to capture a more pure Europe exposure, without having to worry about currency risks.
On the recent webcast, Currency Hedging Strategies, Britta Weidenbach, managing director at Deutsche Asset and Wealth Management, explains how the continued low inflation and weaker economic data in the Eurozone will provide the European Central Bank with greater room to enact stimulus measures.
As the loose monetary policies run their course, the economy could strengthen and the euro currency could further depreciate against the U.S. dollar. Consequently, investors interested in Europe exposure but are concerned about currency risks can take a look at the Deutsche X-Trackers MSCI Europe Hedged Equity ETF (NYSEArca: DBEU). According to a recent survey, the majority of advisors are looking for the best ways to implement currency hedged strategies in as people try to limit risk with overseas investments.
Potential investors, though, should be aware that DBEU includes broad European exposure. The United Kingdom and Switzerland make up a combined 43.2% weight in the ETF’s portfolio.
The looser ECB policies seem to be doing the trick as Eurozone banks are reporting improved loan demand. Corporate, mortgage lending and consumer credit have all been steadily rising since 2012.
While we may have experienced some recent hiccups in the Eurozone, Weidenbach points out that activity indicators have been on an expansionary trend over the past two years. Additionally, the positive trend in activity could indicate an acceleration in earnings growth. [Currency Hedged ETFs Continue to Shine]
The looser monetary policies have contributed to a weaker euro currency, and a depreciating euro currency would also benefit export oriented companies.
On the other end of the currency trade, the U.S. dollar could be moving into high gear. Since 1968, the average USD cycle lasted about eight years. For more than a decade, the greenback has been in a secular decline.
“With QE coming to a close, the dollar could potentially return to it’s upwards strengthening part of the cycle,” Jack Fowler, ETF regional V.P. at Deutsche Asset and Wealth Management, said.
Looking at the European equities space, the MSCI Eurozone Market Cap weighted Index shows slightly above average forward price-to-earnings ratios but the cyclicle adjusted price-to-earnings ratio remain well below its median since 1983. Nevertheless, European stocks still look cheaper than U.S. markets. For instance, DBEU shows a P/E of 15.7 and a price-to-book of 1.7. In comparison, the S&P 500 has a 17.1 P/E and a 2.4 P/B. [Go-Go Days for Currency Hedged ETFs]
Financial advisors who are interested in learning more about currency-hedged strategies can listen to the webcast here on demand.