Although the euro has been strong against the dollar this year, Eurozone equities are performing admirably while showing signs of finally playing catch up with their U.S. counterparts.
And even with the strong euro/disappointing dollar scenario, the Deutsche X-trackers MSCI EMU Hedged Equity ETF (NYSEArca: DBEZ) and the Deutsche X-trackers MSCI Germany Hedged Equity Fund (NYSEArca: DBGR), two ETFs that should benefit from a weaker euro, are up an average of 14% year-to-date.
As Deutsche Asset Management has pointed out, these Europe-related ETFs are attractively priced relative to U.S. markets. DBEZ shows a 14.9 price-to-earnings ratio and a 1.7 price-to-book while DBGR trades at a 14.0 P/E and 1.7 P/B. In contrast, the S&P 500 is hovering around a 19.9 P/E and a 2.8 P/B.
For its part, DBEZ is up more than 14% this year and resides just 3% below its 52-week high. The ETF is up 2% since the start of the fourth quarter and that could be setting the stage for more upside in 2018 as the European Central Bank (ECB) maintains loose monetary policies.
“With active central banks, currency fluctuations are very prevalent in today’s market. These fluctuations can lead international investors to take on additional currency risk—the potential for diminished returns as foreign currencies move against the U.S. dollar,” notes Deutsche Asset Managment. “Currency-hedged investments seek to minimize currency risk and provide the potential for higher returns than their unhedged counterparts, especially during periods of U.S. dollar strength.”
Market observers project earnings per share growth for European stocks to remain strong and build upon the success over the first two quarters of the year. In the first half of the year, earnings upgrades were broad and far reaching instead of concentrated to specific areas. Since October 2016, trailing 12-month EPS of European stocks are up to double digits, and since July of last year, 12-month forward EPS expectations are up by a similar amount as well due to a strengthening global economy.
“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 the issuer.
DBEZ holds more than 700 stocks and allocates about 60% of its combined weight to Germany and France, the two largest Eurozone economies.
For more information on hedged options, visit our currency hedged ETFs category.