Exchange traded fund investors who are seeking to diversify their equity portfolios should consider including relatively cheaper European stocks as the European Central Bank looks at adding quantitative easing, but people should mind currency risks.
For instance, the iShares MSCI EMU ETF (NYSEArca: EZU) and the SPDR EURO STOXX 50 (NYSEArca: FEZ) both focus on Eurozone countries. EZU shows a 15.8 price-to-earnings ratio and a 1.4 price-to-book while FEZ has a 15.2 P/E and a 1.4 P/B. In contrast, the S&P 500 index has a 17.6 P/E and a 2.5 P/B.
Looking ahead, if the European Central Bank enacts a full-blown quantitative easing program, similar to the size and scope of the Federal Reserve’s bond purchasing plan, Eurozone markets could experience a sizable rally. As monetary easing helps stimulate the economy, traders anticipate the expansion will translate to earnings growth in the Eurozone.
The European Monetary Union’s ECB will release its announcement next Thursday, December 4. [Ahead of ECB Meeting, Hedge Euro ETF Back in the Spotlight]
U.S. investors, though, will have to monitor currency risks when investing overseas, especially in Europe where a QE program would greatly depreciate the euro currency – a weak euro means that investors would generate lower U.S.-dollar-denominated returns. The euro currency has depreciated about 9.3% so far this year to $1.2475.
Nevertheless, ETF investors can utilize currency-hedged Europe funds that capture European markets while mitigating the negative effects of a depreciating euro currency or appreciating U.S. dollar.
For example, the Deutsche X-Trackers MSCI Europe Hedged Equity ETF (NYSEArca: DBEU) and WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ) are among the two largest options available. The ETFs hedge against the euro currency and would outperform a non-hedged Europe equity ETF if the euro currency depreciates. Potential investors should note that these ETFs could underperform a non-hedged ETF in the event the euro strengthens. DBEU has a 15.5 P/E and a 1.7 P/B while HEDJ has a 16.7 P/E and a 1.9 P/E. [Currency Hedged ETFs for Exploiting ECB Easing]
DBEU takes a slightly broader approach to the European markets. Specifically, the Deutsche Bank offering includes a 28.4% position in United Kingdom stocks and 14.8% in Switzerland. In contrast, HEDJ only tracks Eurozone members. DBEU also leans toward financial sector names at 22.8% of its portfolio, followed by consumer staples 18.9% and industrials 9.8%. Meanwhile HEDJ tilts toward consumer staples 22.2%, followed by industrials 18.8% and consumer discretionary 17.3%.
Investors who want to compare the non-hedged to the hedged equity ETFs can also look at the iShares Currency Hedged MSCI EMU ETF (NYSEArca: HEZU), the euro-hedged version of EZU. Over the past three months, HEZU has increased 4.1%, whereas EZU declined 2.2% as the euro currency depreciated 2.1% against the USD.
For more information on Europe, visit our Europe category.
Max Chen contributed to this article.