Managing volatility amidst eurozone opportunity and uncertainty
Given the potential upside of equity exposure to the eurozone (for reasons outlined above), the risk associated with the rise in valuation levels and the ongoing uncertainty associated with a potential Greek exit from the eurozone (or “Grexit”), I believe a volatility-managed solution may be a sensible approach for investors to gain exposure to this critical region. In addition, I believe the divergent monetary policy between the European Central Bank and the Federal Reserve highlights the downside risk to the value of the euro and emphasizes the need for investors to consider a currency hedge to mitigate the foreign exchange risk. A currency-hedged low volatility approach provides investors the opportunity to participate in the upside in the face of stretching valuations and exchange rate risk, as well as a downside risk mitigation smart beta strategy.
PowerShares Europe Currency Hedged Low Volatility Portfolio
PowerShares has introduced the first ETF offering a currency-hedged low volatility approach to Europe — the PowerShares Europe Currency Hedged Low Volatility Portfolio (ticker: FXEU). FXEU provides exposure to the S&P Eurozone Low Volatility USD Hedged Index, which is composed of the 80 least volatile stocks in the S&P Eurozone BMI. Index holdings are currency hedged to the US dollar using rolling one-month forward contracts that are adjusted monthly. The ETF and index constituents are reconstituted quarterly. Constituents are weighted relative to the inverse of the trailing 12-month realized volatility, with the least volatile stocks receiving the highest weights.
1 Source: WorldBank, as of December 2013; report printed December 2014
2 Source: Markit Economics press release July 3, 2015
3 Source: Bloomberg L.P. as of June 30, 2015