Market Overview

Central Banks Lift Currency Hedged ETFs

Exchange traded funds offering exposure to foreign stocks with hedged currency kicker have been stout performers this year as an array of central banks have engaged in accommodative monetary policy.

The undisputed king of the hedged currency ETF space is the WisdomTree Japan Hedged Equity Fund (NYSE: DXJ), though there have been other solid performers such as the db X-trackers MSCI EAFE Hedged Equity Fund (NYSE: DBEF).

Thursday's central bank commentary indicates investors may want to consider a pair of other hedged currency ETF, starting with the WisdomTree Europe Hedged Equity Fund (NYSE: HEDJ). While U.S. markets were closed for Independence Day, European Central Bank President Mario President Mario Draghi was telling markets that the ECB is open to rate cuts, including on the discount rate.

Draghi is faced with the task of trying to jump-start economic growth in a region still mired in an unprecedented sovereign debt problem. And he has to fight a euro that many perceive as overvalued relative to the other major currencies. Assuming Draghi does take overt steps to weaken the euro, HEDJ could become the DXJ for Europe.

Actually, HEDJ already is. As DXJ does with the yen, 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.

HEDJ uses another page from HEDJ's playbook and that is focusing on European exporters, or those companies that stand to benefit from a weak euro. It was less than a year ago that HEDJ converted from a a multi-currency ETF focused on several regions in addition to Europe to an ETF focused exclusively on European dividend-paying exporters.

It is fair to say HEDJ may be at the right place at the right time as Goldman Sachs said the ECB is more likely than not to ease from here and that the central bank could consider a deposit rate reduction if the eurozone economy continues to weaken.

Either some investors saw this coming from the ECB or they like the idea of an equity-based ETF that offers a way of profiting from a falling euro. Whatever the case may be, HEDJ did not even have $22 million in assets under management in mid-October. The fund entered trading today with $327.6 million in AUM.

New Kid on The Block
Not all new ETFs need to be bought the first day they start trading. Some probably should not be bought six months later, either. However, waiting around for metrics, such as volume, to accumulate that have no affect on total returns is not always the best idea. The WisdomTree United Kingdom Hedged Equity Fund (NYSE: DXPS) could prove to be an example of a new ETF worth considering now, not later.

The Bank of England is telling investors to give DXPS, the first ETF that hedges British pound/U.S. dollar fluctuations, a look. Another way of looking at DXPS is that it is the DXJ for the pound and U.K. stocks.

Goldman said the Bank of England could engage in "more unconventional easing" and that an interest rate increase is not likely there until mid-2015. Research firm Capital Economics agreed that BoE could add easing measures this year, CNBC reported.

Markets have bought into the notion that BoE will ease because GBP/USD is down 1.1 percent today and trading at its lowest levels since early June. That is good news for DXPS, which is up 2.6 percent, indicating that the new ETF will benefit from falling sterling.

Top-10 holdings in the new ETF include Vodafone (NYSE: VOD), GlaxoSmithKline (NYSE: GSK), BP (NYSE: BP) and BHP Billiton (NYSE: BHP).

For more on ETFs, click here.

Posted-In: Long Ideas News Short Ideas Specialty ETFs Eurozone New ETFs Currency ETFs Forex Best of Benzinga

 

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