Political volatility returned to the Eurozone, sending the common currency and stocks there sliding Tuesday. Amid rising political risks in Italy and Spain, the Eurozone’s third- and fourth-largest economies, respectively, the euro hit a six-month low against the dollar yesterday.
With the U.S. dollar recently gaining strength against a basket of major developed market currencies, including the euro, investors may want to revisit currency hedged exchange traded funds, including the X-trackers MSCI EMU Hedged Equity ETF (NYSEArca: DBEZ).
“The euro was shoved lower after Italian President Sergio Mattarella blocked two antiestablishment parties from taking power by rejecting their euroskeptic candidate for economy minister,” reports MarketWatch.
DBEZ “seeks investment results that correspond generally to the performance, before fees and expenses, of the MSCI EMU IMI U.S. Dollar Hedged Index. DBEZ offers investors purer access to Eurozone equities while seeking to mitigate exposure to currency fluctuations between the U.S. dollar and the euro,” according to DWS.
Spanish and Italian stocks combine for about 16.7% of the fund’s geographic exposure.
Inside The Action
DBEZ holds more than 700 stocks and allocates about 60% of its combined weight to Germany and France, the two largest Eurozone economies. The Netherlands and Spain combine for almost 20%. The ETF allocates about 19% of its weight to financial services stocks and over 15% to industrial names. DBEZ is also levered to the recovering European consumer with a 13.7% weight to consumer discretionary stocks.
“Analysts have said the result of any new ballot would be seen as a referendum by Italians about their view of the euro and membership in the European Union, reviving worries about the stability of the eurozone,” according to MarketWatch.
Yields on two-year Italian bonds jumped to the highest levels since 2013 on Monday, reflecting investors’ expectations that the political situation there is volatile and that the euro could continue slumping.
In Spain, Prime Minister Mariano Rajoy has to contend with a no-confidence vote later this week. That could lead to the ouster of his party at the hands of a socialist party. If the socialists succeed, they have pledged to call for a new election that could remove Rajoy.
For more information on the currency hedging strategy, visit our currency-hedged ETFs category.