Currency-Hedged ETFs for Europe Exposure as ECB Considers Rate Cuts | ETF Trends

With the European Central Bank hinting at an intervention if the growth outlook further deteriorates, investors who are looking into the Eurozone may want to consider a currency-hedged Europe exchange traded fund to limit foreign exchange risks.

European Central Bank President Mario Draghi said the central bank was looking into interest rate cuts, fresh bond purchases and new policy guidance to counteract the region’s persistently low inflation, which has kept falling short of its target for the past six years or most of his eight-year term as president, Reuters reports.

With a prolonged global trade war weighing on confidence, Europe’s export-oriented manufacturing sector has taken a heavy blow.

“This outlook is getting worse and worse, and it is getting worse and worse in manufacturing and getting worse and worse in countries where manufacturing is very important,” Draghi told a news conference.

The ECB has set an inflation target “close to but below” 2% for 16 years, but Draghi pointed out that after the prolonged undershot, the target is considered symmetric and there would be no cap at 2%. Some policymakers were even advocating a complete shift to an inflation target for the first time since 2003.

“We don’t like what we see on the inflation front and symmetry means basically there is no 2% cap,” Draghi said. “We don’t accept permanently lower inflation and symmetry means the Governing Council will act with the same determination whether inflation is above or below the inflation aim.”

The ECB kept interest rates unchanged on Thursday, but Draghi assuaged market observers by adding that the central bank was looking into a stimulus package as soon as September.

Additionally, the central bank changed its wording and saw rates at present or lower through mid-2020, compared to its previous stance to keep rates unchanged through next June.

Investors who believe a fresh round of stimulus will support the Eurozone markets and weaken the euro currency can look to currency-hedged ETFs like the Deutsche X-trackers MSCI EMU Hedged Equity ETF (NYSEArca: DBEZ), iShares Currency Hedged MSCI EMU ETF (NYSEArca: HEZU) and WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ).

As ETF investors seek international exposure to diversify their equity portfolio and potentially tap into more attractive plays abroad, traders should consider currency-hedged strategies that allow investors to capture upside potential in the global markets while hedging against potentially weakening international currencies or a stronger U.S. dollar.

For instance, as the euro currency weakened 2.8% against the U.S. dollar so far this year, DBEZ increased 21.7%, HEZU advanced 21.6% and HEDJ rose 22.5% while the un-hedged Vanguard FTSE Europe ETF (NYSEArca: VGK), the largest Europe-related ETF on the market, gained 15.6%.

For more information on the European markets, visit our Europe category.