European stocks are wilting alongside their U.S. counterparts and that is, predictably causing problems for some familiar exchange traded funds that track European equities.
With Monday’s loss, the S&P 500 is down almost 6.7% over the past month, but Germany’s DAX and France’s CAC 40 are each down more than 8% over that period and the Euro Stoxx 50 is on its worst losing streak in 17 months.
Those facts (and others) are not inspiring investors to stick with select Europe ETFs with the notable names such as the Vanguard FTSE Europe ETF (NYSEArca: VGK), the largest U.S.-listed Europe ETF. VGK, which earlier this year was one of the top asset-gathering ETFs after adding assets for eight straight quarters, has shed $2 billion, the most ever, over the past three months, reports Sofia Horta e Costa for Bloomberg.
As Bloomberg notes, investors have shown comparable disdain for single-country Europe ETFs. Since the start of the third quarter, investors have pulled $362.2 million from the iShares MSCI Italy Capped ETF (NYSEArca: EWI) and $201 million from the iShares MSCI Spain Capped ETF (NYSEArca: EWP). The iShares MSCI France ETF (NYSEArca: EWQ) is lighter by $134 million since the start of the July and outflows from the France ETF could accelerate after the CAC 40 hit a 52-week low Monday. [No French Kiss for This ETF]
Outflows from VGK and comparable Europe ETFs serve as a reminder of the currency risks investors take on when investing in markets outside the U.S.
While Eurozone nations combine for about 48% of VGK’s weight, the ETF allocates another 46.7% to the U.K. and Switzerland. That country lineup has made VGK increasingly vulnerable at a time when the euro, British pound and Swiss france are weakening and the U.S. dollar is gaining strength. [Euro Could Betray Seasonal Trends]
In periods of dollar weakness, investors have enjoyed a return advantage with global ETFs, but that landscape is shifting with some advisors and investors under-allocated to ETFs to hedge currency risk. Fortunately, some have gotten the message.
Since the start of third quarter, the Deutsche X-Trackers MSCI Europe Hedged Equity ETF (NYSEArca: DBEU), which can used in portfolios as currency hedged alternative to VGK, has added nearly $200 million in new assets. DBEU has more than doubled in size just this year. In fact, DBEU doubled in size in a single day earlier in 2014.
The WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ) has been another prodigious gather of assets even, serving as further proof that not all Europe ETFs are being abandoned.
Since the start of the third quarter, HEDJ has added nearly $1.2 billion in assets. The ETF has nearly tripled in size since April.
While ETF inflows make for nice anecdotes and conversation pieces, returns are what really matters. DBEU and HEDJ have not been on torrid paces this year, but the pair prove currency hedging in the ETF wrapper works. At the very least, DBEU and HEDJ have been significantly less bad than VGK.
