Buoyed by the flight to riskier assets, the euro is off to a
solid start against the U.S. dollar this year. That much is
proven by the CurrencyShares Euro Trust (NYSE:
), which was up 2.2 percent year-to-date at the start of trading
Following a surge for European equities last year, some
investors may be left thinking everything is fine and dandy with
the common currency used by 17 nations. After all, at the ETF
level, it was those funds that assume currency risk that were
inflow leaders in 2012.
A case can be made that things are improving in the Eurozone,
but that can be countered with the notion that the euro is not
yet out of the wood. That means investors should consider a hedge
to currency risk when evaluating European equities and the
"I believe both the euro and the U.S. dollar have their fair
share of potential weaknesses," said WisdomTree Research Director
Jeremy Schwartz in a new research note. "Ultimately, the
situation begs the question: Should investors trying to capture
the relatively low prices of European stocks take on additional
euro risk-namely positioning themselves so that their investments
may decline from a weakening euro compared to the U.S. dollar-in
Some of the largest Europe-focused ETFs have continued to
impress in 2013 after surging last year. For example, the iShares
S&P Europe 350 Index Fund (NYSE:
) has gained 5.1 percent year-to-date while the SPDR EURO STOXX
) is up about 4.9 percent. The rub with both funds is that each
leaves investors vulnerable to potential euro weakness.
"It is widely understood that currency performance can add
significant volatility to international equity returns, but the
difficult question regards whether investors receive
compensation, i.e., a potential increase in their returns, for
taking on this additional risk,"
Schwartz said in the note
Investors that want to embrace the attractive valuations still
being offered by some European stocks while skirting currency
risk have options, including the WisdomTree Europe Hedged Equity
). In rough terms, HEDJ is the hedged euro equivalent of
the wildly popular
WisdomTree Japan Hedged Equity Fund (NYSE:
HEDJ is "designed to have higher returns than an equivalent
non-currency hedged investment when the value of the U.S. dollar
is increasing relative to the value of the euro, and lower
returns when the U.S. dollar declines against the euro,"
according to WisdomTree
As DXJ does with Japan, HEDJ screens possible constituents to
ensure the fund's holdings are not
heavily dependent on the Eurozone for the bulk of
Top-10 holdings in HEDJ include companies with significant
global exposure such as Anheuser-Busch InBev (NYSE:
), Unilever (NYSE:
), SAP (NYSE:
) and Sanofi (NYSE:
The emphasis on trimming currency volatility has not hampered
HEDJ's returns. WisdomTree altered the ETF's composition to focus
solely on European dividend payers that derive the bulk of their
sales outside the Eurozone in August 2012. Since August 30, the
ETF has soared almost 17 percent.
Investors have bought into HEDJ's new look. On August 21,
the ETF had just $15.3 million in assets under
. As of January 29, that total had surged to $39.4 million,
indicating that some investors are heeding Schwartz's advice to
hedge their euro exposure.
"Bottom line: Investors should consider how much conviction
they have in the potential performance of the euro against the
U.S. dollar-and if the answer is that they have no idea as to its
future direction, which I suspect is the case for many, they
ought to consider hedging that risk, if they are truly trying to
capture the equity opportunity," said Schwartz.
For more on ETFs, click
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