As the European Central Bank President Mari Draghi suggests a new round of stimulus, exchange traded fund investors may consider Europe region-specific strategies that hedge currency risks.
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.
ECB President Draghi signaled the bank could implement a fresh stimulus as soon as July, sending the euro lower against the dollar, the Wall Street Journal reports.
Draghi said ECB policy makers would consider in the weeks ahead how to adapt their policy tools “commensurate to the severity of the risk” to the economic outlook, which leaves open the option to extend the time frame before the next interest-rate increase, a reduction in the already negative policy rate or restarting bond purchases.
The central bank has a number of ways to prop up the economy if inflation does not pick up. “This applies to all instruments,” Draghi said at a forum. “Further cuts in policy interest rates and mitigating measures to contain any side effects remain part of our tool.”
Reflecting how investors are positioning for a much looser monetary policy, German government bonds with maturities ranging from three months to nine years now trade at yields lower than the ECB’s main deposit rate of minus 0.4%.
Market observers are already pricing in a rate cut of 0.10 percentage point by September for the Eurozone.
The statement from the ECB president has also drawn the ire of President Donald Trump, whom has been engaging in trade talks.
“Mario Draghi just announced more stimulus could come, which immediately dropped the Euro against the Dollar, making it unfairly easier for them to compete against the USA,” Trump tweeted about three hours after Draghi’s comments were released.
For investors who believe that international markets will outperform U.S. domestic markets, the Direxion FTSE International Over US ETF (NYSEArca: RWIU) provides a means to not only see international markets perform well, but a way to capitalize on their outperformance compared to the U.S. markets.
For more information on currency-hedged strategies, visit our currency hedged ETFs category.