An ETF For Dealing With European Volatility

In December, European Central Bank President Mario Draghi disappointed global financial markets with smaller-than-expected additions and tweaks to the ECB's quantitative easing regime. Since then, European stocks and the corresponding U.S.-listed exchange-traded funds have not been immune to that disappointment.

However, investors can take advantage of what are now some compelling valuations in Europe while tempering volatility with ETFs such as the iShares MSCI Europe Minimum Volatility ETF (iShares Trust EUMV). Investors willing to bet that developed Europe currencies are in for more downside against the U.S. dollar can make that bet while reducing volatility with the iShares Currency Hedged MSCI Europe Minimum Volatility ETF HEUV.

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Looking into HEUV

As a low volatility ETF, it is not surprising that EUMV is lightly allocated to eurozone economies. On related note, the UK and Switzerland combine for 52.6 percent of the ETF's weight. Nordic economies combine for about 15 percent of EUMV's geographic weight. Still, there is allure with ETF such as EUMV and HEUV, particularly against the backdrop of more ECB easing and the Bank of England holding off on raising rates.

“In Europe, the European Central Bank (ECB) recently reiterated its willingness to ease monetary conditions further to stimulate economic growth, possibly as early as its next policy meeting in March. Indeed, according to the central bank’s recently released meeting minutes, there’s a desire from some ECB members to execute even deeper cuts in their deposit rate, already in negative territory,” according to a recent iShares note.

In terms of doing its job as being a less bad alternative during rocky market environments, EUMV is doing just that. Although the ETF is down 8 percent over the past 90 days, that is about 470 basis points better than the iShares S&P Europe 350 Index (ETF) IEV over the same timeframe.

As for leverage to a falling euro and additional ECB easing, EUMV and its currency-hedged counterpart, HEUV, have that as both ETFs allocate about a third of their respective weights to eurozone nations.

“In other words, Europe remains squarely in a monetary easing cycle, which is jump starting the region’s credit growth and overall business cycles. This environment created a tailwind for Europe’s equity markets in 2015, and I expect it will continue to help the region’s stocks in 2016,” said iShares.

The iShares Currency Hedged MSCI Europe Minimum Volatility ETF, which debuted in October, holds EUMV with a currency-hedged overlay.