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).

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.

With the Federal Reserve looking to hike interest rates and the U.S. economy continuing to strengthen, the U.S. dollar’s recent decline could be quickly pared and even push higher, potentially weakening foreign equity returns once currency fluctuations are taken into account. The Fed has already boosted borrowing costs once this year and some market observers believe that number could reach four by the end of the year.

Reasons To Focus On The Eurozone

Data indicate European stocks, particularly those in the Eurozone, are attractively valued compared to other developed markets. That includes Germany, the largest Eurozone economy.

“We moved to an overweight position on Germany given the record levels of exports that the German economy is currently producing, coupled with a still relatively attractive valuation to the U.S.,” according to recent DWS research.

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.

Last week, the euro fell to its lowest levels of 2018 against the dollar, but some market observers fear the euro’s decline was sparked by disappointing economic data. However, some believe the recent slowdown is natural and not cause for alarm.

The European Central Bank’s chief economist, Peter Praet said Monday, “There is so far no evidence that the moderation in the pace of economic expansion reflects a durable softening in demand,” reports Bloomberg. “Recent information remains consistent with a solid and broad-based expansion in domestic demand.”

For more information on the currency hedging strategy, visit our currency-hedged ETFs category.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.