A Europe ETF That Merits Consideration

Last year, currency hedging and low volatility were popular themes in the exchange traded funds industry. Only one of those themes, low volatility, has made the transition to 2016. Although the European Central Bank has implemented negative interest rates, some currency market observers believe the dollar does not have enough momentum to punish the euro again this year and that is dragging on currency hedged Europe ETFs.

Trouble for European banks has also plagued Eurozone stocks and ETFs, further underscoring the case for ETFs such as the PowerShares Europe Currency Hedged Low Volatility Portfolio FXEU. Three months shy of its first anniversary, FXEU has accumulated $165.5 million in assets under management.

Beyond that superficial metric, FXEU could be the preferred ETF avenue for playing a possible rebound in Eurozone stocks.

“Since 2008, Europe’s eight largest banks have laid off 100,000 employees, paid $63 billion in legal penalties and lost $420 billion in market value. Much of this has come despite accomodative monetary policy. Earlier this month, the head of Morgan Stanley’s global foreign exchange strategy indicated that negative rates were damaging banks in Europe and cited the example of Japan, where he said negative rates were 'not workable,” said PowerShares in a new note. 

FXEU follows the S&P Eurozone Low Volatility USD Hedged Index , which “is designed to include stocks exhibiting low volatility characteristics. The Index holdings are then 100% currency hedged to the US dollar using rolling one month forward contracts that are adjusted monthly,” according to PowerShares. 

It might surprise some investors to learn that FXEU, like some U.S. low volatility ETFs, features financial services as its largest sector weight to the tune of nearly 33 percent. Industrials and consumer staples combine for another 32 percent of the ETF's weight.

Even with the hefty weight to financials and all the controversy surrounding that sector in Europe this year, FXEU has outperformed benchmark currency hedged and non-hedge Eurozone ETFs by wide margins on a year-to-date basis.

“In addition, cuts in bank deposit rates by the ECB have coincided with increased volatility in the eurozone financial markets. This pattern first took hold with ECB rate cuts in June 2014 and September 2014. Volatility escalated further with the most recent rate cut in December 2015, which extends quantitative easing to March 2017,” adds PowerShares.

Volatility for European equities could loom for awhile and that could further bolster the case for FXEU. The ETF has sharply outperformed rival Europe ETFs that do not have a dedicated low volatility objective since coming to market in May.