Another European Central Bank meeting is just 10 days away and with that, some large Wall Street banks are ratcheting up expectations that ECB President Mario Draghi will unveil Federal Reserve-style bond-buying, also known as quantitative easing.
Earlier this month, former Federal Reserve Chairman Ben Bernanke said the ECB would face challenges in implementing U.S.-style quantitative easing, but that has not stopped Goldman Sachs and Credit Suisse from saying the chances of ECB QE are rising. Goldman expects such an announcement in the first half of next year while Credit Suisse thinks it could happen at the Dec. 4 meeting. [Currency Hedged ETFs for ECB Easing]
That could be good news for the WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ), an ETF that has vexed investors with lethargic performance this year despite a weakening euro. HEDJ, the euro equivalent of the ultra-popular WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ), is up 4.5% year-to-date while the CurrencyShares Euro Currency Trust (NYSEArca: FXE) is one of 2014’s worst-performing developed market currency exchange traded funds with a 10% drop.
For some investors, HEDJ’s 4.5% gain is not impressive enough, particularly when considering FXE’s 10% slide.
“Now a lot of US investors have asked why HEDJ’s performance has been sub-optimal. Specifically, why isn’t this strong dollar-weak euro not playing out much like last year’s Japan trade (strong dollar, weak yen) as we saw with DXJ,” said Rareview Macro founder Neil Azous in a note out Monday.
Still, HEDJ is higher on the year while the iShares MSCI EMU ETF (NYSEArca: EZU), which is not a currency hedged ETF, has slid 7.4%. As Azous notes, when switching EZU’s currency to euros from dollars, its performance comes becomes more comparable to HEDJ’s, indicating the WisdomTree ETF is performing as should be expected.
Said another way, HEDJ’s lethargy this year is an equity, not a currency issue, rendering comparisons with DXJ in 2013 limited because Japanese stocks enjoyed significant upside last year as the yen plunged. Eurozone equities have not responded in kind this year even with a weaker currency. [Currency Hedged ETFs: Lessons From Japan]
“So HEDJ is working exactly the way it should given how it is constructed and using HEDJ to get long European stocks and a weaker EUR is correct instrument for that view,” said Azous. “In the end, the difference between HEDJ and DXJ is simply stock performance, not the currency.”
Investors have not been deterred by HEDJ not being an identical 2014 sequel to DXJ. The ETF has added over $3.3 billion in new assets this year, a total surpassed by just nine other ETFs. HEDJ entered Monday as a $4.1 billion ETF after joining the $1 billion club in April. [These ETFs Have Doubled in Size]
WisdomTree Europe Hedged Equity Fund