Currency-hedged Eurozone-related exchange traded funds have gained a lot of traction this year after the central bank enacted an aggressive quantitative easing program, and with first quarter earnings coming in, it seems like the stimulus efforts are working.
Europe ETFs that hedge against a depreciating euro currency have been among the best developed market investments this year. Year-to-date, the Deutsche X-trackers MSCI EMU Hedged Equity ETF (NYSEArca: DBEZ) gained 18.2%, iShares Currency Hedged MSCI EMU ETF (NYSEArca: HEZU) increased 17.9% and WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ) rose 18.2%. [Hedged Europe ETFs As A Strategic, Core Position]
According to Barclays, Europe’s first-quarter earnings are showing better-than-expected results as a weak euro bolstered exports, CNBC reports. Moreover, the bank pointed out that smaller companies are also seeing significant growth.
For instance, the WisdomTree Europe Hedged SmallCap Equity Fund (NYSEArca: EUSC), which targets 76.4% mid-sized and 22.5% small-cap companies, has increased 6.7% since it began trading at the start of March. [Right Place, Right Time for a New ETF]
“While exporters are beating estimates helped by a weaker euro, domestically focused stocks are also beating estimates – but by a greater margin,” Barclays analysts said in a note.
About three-quarters of Euro STOXX 600 companies have reported earnings, with 76% beating or in line with estimates on sales and 67% beating or in line on earnings per share.
The analysts pointed to signs of a pick-up in the Eurozone growth, which received a good jolt from the ECB’s loose monetary policies, as a main driver in earnings strength across smaller companies that focus on the domestic economy.
“Since the financial crisis of 2009, earnings from euro zone corporates have lagged far behind those of their U.S. counterparts, which have already surpassed their previous peaks,” James Sym, a member of the pan-European equity team at Schroders, said in a note. “We see this as an opportunity for European investors as euro zone earnings have the potential to stage a strong recovery from their current depressed levels.”
Market watchers will be waiting on the first-quarter gross domestic product numbers on Wednesday to better gauge the growth – analysts polled by Reuters expect a 0.5% expansion over the previous quarter, compared to the 0.3% quarter-over-quarter growth in the U.K. and 0.2% expansion for the U.S.
Looking ahead, some analysts also anticipate double-digit earnings growth this year as a weaker euro currency, decline in oil prices and lower funding costs help support a continued recovery.
For more information on the European markets, visit our Europe category.
Max Chen contributed to this article.