Now that the euro currency has plunged against the U.S. dollar, European small-caps and related exchange traded funds could outperform their larger counterparts as domestically produced goods look cheaper to consumers than imported wares.
For instance, the WisdomTree Europe SmallCap Dividend Fund (NYSEArca: DFE) and SPDR EURO STOXX Small Cap ETF (NYSEArca: SMEZ) provide exposure to small-capitalization stocks in the Europe region. [2015 Could Be a Good Year for Europe ETFs]
DFE is based on a fundamentally weighted index of small-cap European stocks. Specifically, the ETF weights components by annual cash dividends paid. However, potential investors should be aware that the fund does not hedge its currency risk, so a further depreciating euro currency could weigh on potential returns. Additionally, DFE includes exposure to non-Eurozone members, like the United Kingdom, which makes up 33.0% of the ETF’s underlying holdings.
Alternatively, SMEZ tracks the EURO STOXX Small Index, which is comprised of small-capitalization companies from the Eurozone only. Additionally, the ETF does not hedge against currency risks either.
For those who are interested in small-cap European equities but are wary about further weakness in the euro currency, there are a number of inverse euro currency ETFs one can use to hedge against currency risks. For instance, the ProShares Short Euro (NYSEArca: EUFX) is designed to provide 100% of the inverse, or opposite, return of the U.S. dollar price of the euro, on a daily basis. An inverse currency-hedge position would only make up a small percentage of an investor’s overall Europe exposure. [ECB Meeting Prep with Bearish Euro ETFs]
Since May, the euro currency has declined 15% against the USD and could experience further weakness as the European Central Bank is looking into bank reforms and lower taxes to spur Eurozone growth, reports John W. Schoen for CNBC.
The weaker euro currency has helped boost demand for European goods and services, especially among foreign consumers who are purchasing goods from the region. Additionally, the weaker euro could help spur European consume demand for locally produced goods, which are cheaper than imported goods that are priced in a stronger currency.
Consequently, the improved domestic consumption could help the Eurozone economy expand 1.4% this year compared to 0.8% in 2014, according to IHS Global Insight’s chief European economist, Howard Archer.
“(But) there is a significant risk that the anticipated help to growth coming from low oil prices and the weak euro will be diluted by persistent business and consumer caution resulting from fragile confidence,” Archer said in a note.
SPDR EURO STOXX Small Cap ETF
For more information on the Eurozone, visit our Europe category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.