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European stocks and the related exchange traded funds haven&#39;t been all that bad this year, but when measure against their U.S. counterparts, the picture grows murkier. Year-to-date, the iShares MSCI Eurozone ETF (CBOE: EZU) is up 14.4%, trailing the S&amp;P 500 by nearly 700 basis points.
Eurozone stocks can take some steps toward shedding their laggard status today on the back of the European Central Bank meeting.
The ECB cut the interest rate on deposits by 10 basis points to&nbsp;0.5% Thursday and said it would relaunch quantitative easing.&nbsp;
The risk is that banks in the region will be pinched, a consideration for investors because many eurozone ETFs are heavy on the financial services sector.
&ldquo;While the ECB&rsquo;s strategy is to boost growth and inflation by lowering borrowing costs for companies and households, squeezing banks too much could hamper their ability to supply the credit that fuels the economy,&rdquo; <a href="https://www.bloomberg.com/news/articles/2019-09-11/banks-wince-as-ecb-prepares-to-inflict-more-sub-zero-rate-pain">according to Bloomberg</a>.
In addition to the aforementioned EZU, here are some Europe ETFs to consider today and over the remainder of 2019.
<h3>WisdomTree Europe Hedged Equity Fund</h3>
The WisdomTree Europe Hedged Equity Fund (NYSE: <a class="ticker" href="https://www.benzinga.com/stock/hedj#NYSE">HEDJ</a>) accomplishes two primary goals. First, it exploits weakness in the euro via its currency hedge. Second, its financial services weight is just 11.73%, making that sector merely the fifth-largest in the fund. Additionally, HEDJ is proof positive that there are opportunities in eurozone stocks as this WisdomTree has performed inline with the S&amp;P 500 this year.
&ldquo;It took less than a generation to balloon the ECB&rsquo;s balance sheet from below 1 trillion euros&nbsp;to 4.69 trillion euros ($5.19 trillion) via bond purchases. How big of a dent can the ECB make in equities? This isn&rsquo;t the $24-trillion S&amp;P 500; the <a href="https://www.wisdomtree.com/blog/glossary#MSCI%20EMU%20Index">MSCI EMU Index</a> is worth only 3.77 trillion euros ($4.18 trillion),&rdquo; <a href="https://www.wisdomtree.com/blog/2019-08-13/europes-shmoral-shmazard">according to WisdomTree.</a>
<h3>SPDR EURO STOXX 50 ETF</h3>
The SPDR EURO STOXX 50 ETF (NYSE: <a class="ticker" href="https://www.benzinga.com/stock/fez#NYSE">FEZ</a>) tracks the EURO STOXX 50 Index.
That index &ldquo;captures approximately 60% of the free-float market capitalization of the EURO STOXX Total Market Index, which in turn covers approximately 95% of the free float market capitalization of the represented countries,&rdquo; <a href="https://us.spdrs.com/en/etf/spdr-euro-stoxx-50-etf-FEZ">according to State Street</a>.
FEZ is a concentrated ETF &mdash; it really does hold 50 stocks &mdash;&nbsp;and is worth watching today for a couple of reasons.
First, financial services is the fund&#39;s largest sector weight at just over 16%. Second, France and Germany, the eurozone&#39;s two largest economies, account for two-thirds of the fund&#39;s geographic exposure.
<h3>iShares MSCI Europe Small-Cap ETF</h3>
The iShares MSCI Europe Small-Cap ETF (NASDAQ: <a class="ticker" href="https://www.benzinga.com/stock/ieus#NASDAQ">IEUS</a>), which is not a dedicated eurozone ETF, faces a similar situation to that of U.S. small-cap ETFs: it&#39;s lagging equivalent large-cap funds this year.
IEUS provides exposure to 13 countries, seven of which are eurozone members. The fund devotes 13.39% of its weight to bank stocks, the smaller kind that could be crimped by lower rates, but over a third of its weight goes to cyclical industrial and consumer discretionary names that could be boosted by more easy money from the ECB.
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European stocks and the corresponding exchange-traded funds are among this year&#39;s most resurgent asset classes, a theme made all the impressive when considering the euro&#39;s strength against the dollar and some political volatility in the region earlier this year.
The U.S. Dollar Index is down more than 8 percent this year while the euro is up 11 percent against the greenback. In other words, the 11 percent returned by WisdomTree Europe Hedged Equity ETF (NYSE: <a class="ticker" href="/stock/hedj#NYSE">HEDJ</a>) is all the more impressive when considering dollar weakness. Fortunately for HEDJ, the bull thesis for European equities could prove far more durable than does it for the euro.
&ldquo;Euro bulls may be left leaning on the lamppost if they anticipate a rapid <a href="https://www.wisdomtree.com/blog/glossary#Tapering">tapering</a> of the bond purchase program to &euro;40 billion (or less) or an outright termination anytime soon,&rdquo; said WisdomTree <a href="https://www.wisdomtree.com/blog/2017-09-25/macron-or-draghi-why-we-stick-with-the-italian-stallion">in a recent note</a>. &ldquo;Short and simple. Easy money surprises by the ECB are the play here. It may be better to focus on (ECB president, Mario) Draghi than traditional politicians like (French Prime Minister Emmanuel) Macron.&rdquo;
Related Link: <a href="https://www.benzinga.com/trading-ideas/long-ideas/17/09/10098155/is-it-finally-time-for-oil-etfs-to-shine">Time For Oil ETFs To Shine?</a>
<h3>Hedging Perks</h3>
HEDJ is proving its mettle against the backdrop of euro strength, but the ETF has an enviable long-term track record. Over the past three years, HEDJ has outpaced the MSCI EMU Index by an almost 2-to-1 margin. During that period, HEDJ&#39;s compound annual growth rate has exceeded the MSCI EMU Index by 400 basis points.
There remain supportive data points and potentially rewarding catalysts for eurozone stocks.
&ldquo;Unlike the case with the euro, a <a href="https://www.wisdomtree.com/blog/glossary#Bullish">bullish</a> thesis for European equities is on sounder footing, in our view, especially when the market is compared to the U.S.,&rdquo; said WisdomTree. &ldquo;For example, the yawning gap between 3+ percent European <a href="https://www.wisdomtree.com/blog/glossary#Dividend%20yield">dividend yields</a> and shorter-end gilt-edged German government bonds is more than 4 percentage points, a stark contrast to the tiny margin in the U.S.&rdquo;
<h3>Betting On The ECB</h3>
While eurozone economic data points are improving, those numbers still are not where the ECB wants them to be. Additionally, the central bank&#39;s inflation targets are not being hit, indicating that the ECB could extend its easy money policies. That would endanger euro bulls while potentially boosting HEDJ along the way.
&ldquo;If the ECB instead decides to extend the program again and again and again, as it has been doing, euro longs could be vulnerable,&rdquo; said WisdomTree. &ldquo;Evidence is mounting that the easy-money program and an environment of very low interest rates will likely continue for years, throwing cold water on EUR bulls&rsquo; wants and desires.&rdquo;
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Discount brokerage giant E*Trade Financial Corporation (NASDAQ: <a class="ticker" href="/stock/etfc#NASDAQ">ETFC</a>) is again expanding its commission-free exchange-traded funds platform.
New ETFs to the E-Trade commission-free ETF platform include offerings from JPMorgan Chase &amp; Co. (NYSE: <a class="ticker" href="/stock/jpm#NYSE">JPM</a>), Legg Mason Inc (NYSE: <a class="ticker" href="/stock/lm#NYSE">LM</a>), Michigan-based ACSI Funds, ETF Securities, Arrow Funds and Janus Henderson.
E-Trade is tussling with rivals, including Charles Schwab Corp (NYSE: <a class="ticker" href="/stock/schw#NYSE">SCHW</a>) on fees. The brokerage fee wars include expanding commission-free offerings on ETFs. Schwab has the industry&#39;s largest commission-free ETF platform, but E-Trade has responded by bolstering its commission-free ETF suite several times over the past year.
<h3>Fee Wars</h3>
&ldquo;Schwab&#39;s cuts by lowering its fee for its active trading program and also took down its active-trader hurdle to 30+ trades per quarter from 150+ trades. So E*Trade wants to encourage long-term investing, but created an enticing deal for traders and changed their definition to allow investors who previously didn&#39;t qualify as traders to qualify as traders?&rdquo; <a href="http://www.barrons.com/articles/e-trade-more-commission-free-etfs-but-try-not-to-trade-them-so-much-1502378331">reported Barron&#39;s</a>.
As is often the case with lower commissions or commission-free offerings, the devil is in the details. In the case of E-Trade clients, those wanting to realize the benefits of ETFs without commissions should hold those funds for more than 30 days.
There are currently about 150 ETFs available on a commission-free basis to E-Trade clients.
<h3>Established Names</h3>
Earlier this, E-Trade added ETFs from Guggenheim Investments, IndexIQ, John Hancock and ETF Securities, among others, to its commission-free platform.
Well-known ETFs currently available sans commission to E-Trade clients include the WisdomTree Europe Hedged Equity Fund (NYSE: <a class="ticker" href="/stock/hedj#NYSE">HEDJ</a>), WisdomTree India Earnings Fund (NYSE: <a class="ticker" href="/stock/epi#NYSE">EPI</a>) and the Global X SuperDividend ETF (NYSE: <a class="ticker" href="/stock/sdiv#NYSE">SDIV</a>).
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Data confirm exchange-traded funds set another torrid pace in terms of adding assets in May. What else was confirmed was investors&#39; interest in ex-U.S. developed markets ETFs, including Europe funds.
&ldquo;The headline number for new money flowing into Exchange Traded Funds moderated in May to about $28 billion, down from about $36 billion in April,&rdquo; said <a href="http://altavista-research.com/">AltaVista Research </a>in a recent note. &ldquo;However, stripping out the effect of short sales, net long money flows actually increased slightly, to almost $37 billion in May from $34 billion in April. (The unwinding of short positions increases net long flows).&rdquo;
<h3>International Equity ETFs</h3>
Investors&#39; enthusiasm for international equity ETFs is on the rise in the second quarter as six such funds are among the quarter&#39;s top 10 asset-gathering ETFs. Two of those six &ndash; the iShares MSCI Eurozone ETF (NYSE: <a class="ticker" href="/stock/ezu#NYSE">EZU</a>) and the Vanguard FTSE Europe ETF (NYSE: <a class="ticker" href="/stock/vgk#NYSE">VGK</a>) &ndash; are Europe ETFs. EZU and VGK are diversified Europe ETFs, but the iShares offering is a dedicated Eurozone play while VGK holds British, Swiss and Nordic stocks in addition stocks from Eurozone nations.
&ldquo;But the big take-away from the May data comes from looking under the hood, which shows that foreign assets are capturing an outsized share of investment flows. New money flowing into European stocks represented an increase of 4.4 percent in assets (on a net-long basis), compared with just 0.5 percent for U.S. stocks,&rdquo; said AltaVista.
Data indicate that <a href="https://www.benzinga.com/trading-ideas/long-ideas/17/05/9516474/a-sunny-outlook-for-this-europe-etf">investors allocated capital to Japan</a> and emerging markets ETFs last month at clips that were well ahead of the 0.5 percent seen for U.S. equity funds.
<h3>Shifting Away From U.S.</h3>
&ldquo;The move towards foreign shares makes more sense if it is part of a strategic shift in allocation, since as a group ETF investors are still dramatically overallocated to U.S. stocks,&rdquo; said AltaVista. Of the approximately $2.3 trillion in assets allocated through equity ETFs, about $1.6 trillion, or 71 percent, is invested in U.S. stocks. That compares to about 51 percent of the MSCI All Country World Index that is allocated to U.S. companies.&rdquo;
Other ETFs indicate investors have faith the European Central Bank (ECB) will not taper its quantitative easing regime and that they believe euro is set to decline. The WisdomTree Europe Hedged Equity Fund (NYSE: <a class="ticker" href="/stock/hedj#NYSE">HEDJ</a>) has added nearly $134 million in new money this quarter. HEDJ is up 14.3 percent year to date.
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Europe ETFs Hauled In Plenty Of Cash In May

The outcome was already baked into French assets and the euro, but allegedly liberal France did an allegedly liberal thing by electing male socialist Emmanuel Macron over a female candidate as the next president of the eurozone&#39;s second-largest economy.
<h3>Macron's Victory Over Le Pen</h3>
The euro rose in anticipation of Macron&#39;s victory due in large part to the fact that his opponent, Marine Le Pen, favored France&#39;s departure from the European Union. After rising nearly 3 percent over the past month, the Guggenheim CurrencyShares Euro Trust (NYSE: <a class="ticker" href="/stock/fxe#NYSE">FXE</a>) lost 0.6 percent Monday.
Even if investors can somehow gloss over Macron&#39;s dangerous view that France does not have a problem with Muslim extremism, market participants should not overlook some of the other hurdles he faces going forward. Some of those economic and political hurdles could actually work in favor of diversified currency hedged Europe ETFs, including the WisdomTree Europe Hedged Equity Fund (NYSE: <a class="ticker" href="/stock/hedj#NYSE">HEDJ</a>).
&ldquo;Macron must cobble together a ragtag group of Socialists and Greens to fall in line, even though many members of parliament are steaming from the political battles just waged by Macron,&rdquo; said WisdomTree<a href="https://www.wisdomtree.com/blog/2017-05-08/Macron-vs-the-Coalition-of-the-Unwilling-Its-HEDJ-Time?elqTrackId=fb75f07d58f74766b819da125eaae004&amp;elq=28ee1f2e03014090b5149b1082da53df&amp;elqaid=4516&amp;elqat=1&amp;elqCampaignId=2212"> in a note out Monday</a>. &ldquo;He can ask for support from pro-business Republicans, but that cadre wants to claw back its base, many of whom left permanently for Le Pen&rsquo;s anti-establishment message. Le Pen&rsquo;s Euroskepticism ruffled feathers in the 7th arrondissement, but there are millions of votes elsewhere that Republicans may want to court by snubbing Macron.&rdquo;
<h3>Similar Chorus: Currency, Economy And Elections</h3>
When it comes to the euro, the reality is France should not want a strong common currency. The French economy is export-driven with many of the largest companies on the country&#39;s benchmark CAC 40 Index generating substantial portions of their sales outside the eurozone.
France and Germany, which holds national elections later this year, combine for half of HEDJ&#39;s weight. The ETF allocates about 53 percent of its combined weight to export-heavy industrials and consumer sectors that benefit from a weaker euro.
While there are good reasons to consider Eurozone equities right now, not the least of which are compelling valuations relative to the U.S., the Macron-induced euro rally seems ill-fated, particularly when <a href="https://www.benzinga.com/analyst-ratings/analyst-color/17/03/9233691/lots-to-like-with-eurozone-etfs">the U.S. could still increase interest rates </a>multiple times this year.
&ldquo;Furthermore, clear <a href="https://www.wisdomtree.com/blog/glossary#Monetary%20policy">monetary policy</a> divergence that makes <a href="https://www.wisdomtree.com/blog/glossary#Hedge">hedging</a> the euro particularly interesting at this moment is unfolding: the U.S. Federal Reserve (Fed) is hiking <a href="https://www.wisdomtree.com/blog/glossary#Interest%20rates">interest rates</a> and removing accommodation, while the ECB may have to <a href="https://www.wisdomtree.com/blog/glossary#Tapering">taper</a> down its massive bond purchase program before it thinks about increasing its deeply negative short-term rates,&rdquo; said WisdomTree.
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________ 
Image Credit: "Emmanuel Macron at the French-Chinese economic Summit" By Pablo Tupin-Noriega - Own work, CC BY-SA 4.0, <a href="https://commons.wikimedia.org/w/index.php?curid=41407617">via Wikimedia Commons</a>

Politics

General

An ETF Prescription For Post-Election France

After several years of lagging the United States and other major developed markets, European stocks and the related exchange-traded funds look to be awakening from that slumber. With investors clamoring for value plays outside the United States, the resurgence of Europe ETFs is looking well-timed.
<h3>Europe ETFs</h3>
The SPDR EURO STOXX 50 ETF (NYSE: <a class="ticker" href="/stock/fez#NYSE">FEZ</a>) and the iShares MSCI Eurozone ETF (NYSE: <a class="ticker" href="/stock/ezu#NYSE">EZU</a>) are each up 9 percent year-to-date, indicating investors are enthusiastic about the prospects of a legitimate economic and equity market recovery in the eurozone. Both ETFs are heavily allocated to Germany and France, the eurozone&#39;s two largest economies.
&ldquo;Recent fund flow statistics suggest investors are increasingly looking to invest in the eurozone via U.S.-listed exchange-traded funds (ETFs), despite political risk factors related to upcoming Brexit negotiations and key elections in France and Germany,&rdquo; said <a href="https://www.cfraresearch.com/">CFRA Research</a> in a note out Wednesday.
Although the CurrencyShares Euro ETF (NYSE: <a class="ticker" href="/stock/fxe#NYSE">FXE</a>) is up 2.5 percent this year and the dollar is slumping against other major currencies, data indicate investors are embracing currency hedged Eurozone ETFs. Those funds usually <a href="https://www.benzinga.com/trading-ideas/long-ideas/17/03/9131114/things-keep-looking-up-for-this-europe-etf">rise when the euro weakens</a> against the dollar. Even with the common currency trading higher, the WisdomTree Europe Hedged Equity ETF (NYSE: <a class="ticker" href="/stock/hedj#NYSE">HEDJ</a>) is higher by almost 9 percent this year.
<h3>Honing Into HEDJ</h3>
Over the years, HEDJ has risen to prominence as one of the premier alternatives for investors looking for eurozone exposure with protection from the <a href="https://www.benzinga.com/trading-ideas/long-ideas/16/10/8590025/getting-reacquainted-with-an-old-europe-etf-friend">euro&#39;s gyrations against the dollar.</a>
Data suggest HEDJ&#39;s methodology works. Over the past three years, not only has HEDJ been slightly less volatile than the MSCI EMU Index, the WisdomTree ETF has outperformed that index by an almost 20-to-1 margin. That serves as a reminder of the unintended consequences of investors not acknowledging currency risk. Plus, HEDJ components are currently sporting attractive valuations.
HEDJ&#39;s &ldquo;exposure is higher to Spain (19 percent of assets) and Netherlands (17 percent) than the two previously-highlighted ETFs, though Germany (26 percent) and France (24 percent) are still the largest country exposures,&rdquo; said CFRA. &ldquo;In addition to hedging exposure to fluctuations between the U.S. dollar and the euro, HEDJ holds companies that derive at least 50 percent of revenues from countries outside of Europe and weighted based on annual cash dividends. HEDJ has shed approximately $715 million of assets in 2017.&rdquo;
CFRA has Market-Weight ratings on EZU and HEDJ and an Overweight rating on FEZ.
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Analyst Color

Analyst Ratings

Lots To Like With Eurozone ETFs

Among developed markets equities, the United States is again asserting a leadership role to start 2017 with the S&amp;P 500 up 6.7 percent. European stocks are looking strong as well.
As measured by the WisdomTree Europe Hedged Equity Fund (NYSE: <a class="ticker" href="/stock/hedj#NYSE">HEDJ</a>), eurozone equities have been a better place to be start 2017 than other ex-U.S. developed markets. HEDJ is up 6 percent year-to-date, while the MSCI EFA Index and the largest diversified Europe ETF trading in the United States are higher by an average of 5.3 percent.
<h3>How HEDJ Has Performed</h3>
Over the years, HEDJ has risen to prominence as one of the premier alternatives for investors looking for eurozone exposure with protection from the <a href="https://www.benzinga.com/trading-ideas/long-ideas/16/10/8590025/getting-reacquainted-with-an-old-europe-etf-friend">euro&#39;s gyrations against the dollar.</a>
Data suggest HEDJ&#39;s methodology works. Over the past three years, not only has HEDJ been slightly less volatile than the MSCI EMU Index, the WisdomTree ETF has outperformed that index by an almost 20-to-1 margin. That serves as a reminder of the unintended consequences of investors not acknowledging currency risk. Plus, HEDJ components are currently sporting attractive valuations.
Related Link: <a href="https://www.benzinga.com/trading-ideas/long-ideas/17/02/9077841/a-europe-etf-to-revisit">A Europe ETF To Revisit</a>
&ldquo;Since its inception, the WisdomTree Europe Hedged Equity Index has traded at an average of a 4 percent discount to the S&amp;P 500. As of January 31, 2017, with the S&amp;P 500 trading at a 21.6x <a href="https://www.wisdomtree.com/blog/glossary#Price-to-earnings (P/E) ratio">price-to-earnings (P/E) ratio</a>, the WisdomTree Europe Hedged Equity Index is only trading at a 16.7x P/E ratio, a 23 percent discount. This valuation gap is close to the largest it has been since the Index has existed,&rdquo; said WisdomTree <a href="https://www.wisdomtree.com/blog/2017-03-03/european-exporters-signaling-rare-value-opportunity">in a recent note</a>.
<h3>HEDJ's Export Exposure</h3>
Due to its focus on exporters, HEDJ is heavily exposed to consumer sectors and others with export exposure. Industrials, consumer discretionary and consumer staples stocks combine for over 53 percent of the ETF&#39;s weight. Conversely, the ETF is not heavily exposed to some sectors that, in Europe, have recently struggled to generate robust earnings growth.
&ldquo;Over the past five years, there has been a divergence in European equity earnings growth. While each of the four largest over-weighted sectors for the WisdomTree Index have [sic] had relatively good growth in their earnings, Energy and Financials have seen their earnings contract over the past five years,&rdquo; said WisdomTree.
Energy and financial services combine for just 15 percent of HEDJ&#39;s lineup.
HEDJ&#39;s relatively low financial services allocation is an advantage at a time when global investors are increasingly concerned about the strength of banks throughout some major eurozone economies.

Things Keep Looking Up For This Europe ETF

European stocks are in the midst of a lengthy stretch, nearly a decade to be precise, of lagging their U.S. counterparts. Additionally, with national elections looming this year in several of the eurozone&#39;s largest economies, investors might be in for some political volatility across the pond.
Those might be reasons to avoid European equities and exchange-traded funds such as the WisdomTree Europe Hedged Eq Fund (NYSE: <a class="ticker" href="/stock/hedj#NYSE">HEDJ</a>), but those concerns could be giving way to a credible contrarian opportunity with eurozone stocks.
<h3>Let's Look At HEDJ</h3>
For its part, HEDJ <a href="https://www.benzinga.com/trading-ideas/long-ideas/17/02/9015830/cest-la-vie-election-focus-on-france-etf">is already performing well</a>. Year-to-date, the ETF is higher by nearly 1.5 percent, bringing its 12-month gain to almost 24 percent. A gain of almost 1 percent yesterday brought the currency hedged ETF to within 0.85 percent of its 52-week high.
Data suggest eurozone economies are strengthening, which could translate to more good news for ETFs like HEDJ.
&ldquo;Over the last quarter, we&rsquo;ve started to see a meaningful rebound in economic data from the <a href="https://www.wisdomtree.com/blog/glossary#Eurozone (EZ)">eurozone</a> in the form of increasing <a href="https://www.wisdomtree.com/blog/glossary#Purchasing Managers' Index (PMI)">PMIs</a> and a modest uptick in <a href="https://www.wisdomtree.com/blog/glossary#Euro Area">euro area</a> capital spending. While no one is ready to claim that Europe&rsquo;s troubles have been resolved, the early signs in the data are encouraging. In response, we&rsquo;ve also seen a meaningful rebound in <a href="https://www.wisdomtree.com/blog/glossary#Cyclical sectors">cyclical sectors</a> like Industrials and businesses linked to the consumer,&rdquo; said WisdomTree <a href="https://www.wisdomtree.com/blog/2017-02-09/us-rates-may-signal-opportunity-in-europe">in a note out Thursday</a>.
<h3>Methodology And Strategy</h3>
HEDJ allocates over 37 percent of its weight to industrial and consumer discretionary names, two of the eurozone&#39;s more export-driven sector. That jibes with HEDJ&#39;s methodology, which includes a tilt toward exporters that benefit from a weak euro.
Data suggest HEDJ&#39;s methodology works. Over the past three years, not only has HEDJ been slightly less volatile than the MSCI EMU Index, the WisdomTree ETF has outperformed that index by an almost 20-to-1 margin. That serves as a reminder of the unintended consequences of investors not acknowledging currency risk.
Germany and France, the eurozone&#39;s two-largest economies and both of which hold national elections this year, combine for over 50 percent of HEDJ&#39;s geographic weight. The ETF is lightly allocated to troubled Italy and still fragile Portugal as the countries combine for just 2 percent.
&ldquo;In sum, we believe that Europe currently presents an opportunity for investors. While risks remain, we believe that the market may be overly pessimistic about the likelihood of political dysfunction. In our base case for 2017, we believe U.S. rates will continue to rise on the back of a rebound in global growth. Should the current relationship between Europe and U.S. rates hold, this could present an opportunity in the medium term for European equities,&rdquo; added WisdomTree.

Europe ETFs Could Be Ready To Shine

The old adage about not judging books by their covers is particularly applicable when it comes to exchange-traded funds. Many ETFs from competing issuers have similar names, but further examination reveals these funds are far from being twins.
Take the case of the WisdomTree Europe Hedged Equity Fund (NYSE: <a class="ticker" href="/stock/hedj#NYSE">HEDJ</a>), highlighted in a note out from <a href="https://www.wisdomtree.com/etfs/equity/hedj">CFRA Research</a> Thursday.
<h3>Example No. 1</h3>
As CFRA pointed out, HEDJ&#39;s name arguably implies it is a broad Europe ETF, indicating that it can hold British, Swedish or Swiss equities. In reality, HEDJ has become one of the bellwether Europe ETFs trading in the U.S. because it is a dedicated eurozone play, focusing only on countries that use the euro, while providing a currency hedge.
Conversely, the iShares MSCI Eurozone ETF (NYSE: <a class="ticker" href="/stock/ezu#NYSE">EZU</a>) clearly indicates that it is a dedicated Eurozone ETF. However, that ETF lacks the currency hedge found in HEDJ, explaining why<a href="https://www.benzinga.com/trading-ideas/long-ideas/16/10/8590025/getting-reacquainted-with-an-old-europe-etf-friend"> HEDJ is up 29.2 percent</a> over the past 36 months while EZU is in the red.
&ldquo;Some currency-hedged ETFs such as iShares Currency Hedged MSCI Eurozone are explicit that they focus on companies domiciled in the European Monetary Union, such as Sanofi and Siemens. But, HEDJ sounds like an ETF that might also have exposure to British American Tobacco or Nestle. Yet HEDJ has no exposure to companies based in the United Kingdom or Switzerland because it too focuses only on the eurozone,&rdquo; said CFRA.
<h3>Example No. 2</h3>
Another prime example of an ETF pair with similar names but widely different underlying baskets of holdings are the the iShares U.S. Home Construction ETF (NYSE: <a class="ticker" href="/stock/itb#NYSE">ITB</a>) and the SPDR S&amp;P Homebuilders ETF (NYSE: <a class="ticker" href="/stock/xhb#NYSE">XHB</a>).
ITB focuses more on pure-play homebuilders while XHB has a heavy discretionary tilt. Not surprisingly, their three-year returns are not close as ITB is higher by 27.3 percent compared to 16.3 percent for XHB.
Another good example is the case of the Vanguard Telecom ETF(NYSE: <a class="ticker" href="/stock/vox#NYSE">VOX</a>) and the SPDR S&amp;P Telecom ETF (NYSE: <a class="ticker" href="/stock/xtl#NYSE">XTL</a>). VOX is heavily allocated to AT&amp;T Inc. (NYSE: <a class="ticker" href="/stock/t#NYSE">T</a>) and Verizon Communications Inc. (NYSE: <a class="ticker" href="/stock/vz#NYSE">VZ</a>), while XTL mixes in newer technology names, including some cybersecurity stocks. 
&ldquo;XTL outperformed VOX by more than 200 basis points in 2016, but underperformed by 400 basis points in 2015, a reminder that when the constituents are different the records will be as well,&rdquo; added CFRA. 
The research firm has Market-Weight ratings on HEDJ, VOX and XTL and Overweight ratings on the two homebuilder ETFs.

Sector ETFs

Education

iShares Dow Jones US Homenstruction Index Fund

What's In An ETF Name Often Requires Further Investigation

For a significant portion of 2016, the euro vexed investors, rising in spite of the European Central Bank&#39;s (ECB) best efforts to weaken the common currency. Over that span, the Guggenheim CurrencyShares Euro Trust (NYSE: <a class="ticker" href="/stock/fxe#NYSE">FXE</a>) was, surprisingly to some, one of the better-performing currency exchange-traded funds.
That has gone by the wayside and with a recent slide, FXE is down half a percent year-to-date. What is good news for euro bears is also good news for currency hedged ETFs, a once hot group that has been maligned for much of this year as the dollar has disappointed. Well, here it is late October and the WisdomTree Europe Hedged Eq Fund (NYSE: <a class="ticker" href="/stock/hedj#NYSE">HEDJ</a>) is up 4.5 percent year-to-date.
<h3>Significance</h3>
That is significant for a number of reasons, not the least of which is the fact that in arguably quiet fashion, HEDJ is once again throttling its unhedged counterparts. For example, the largest unhedged eurozone ETF and the Vanguard FTSE Europe ETF (NYSE: <a class="ticker" href="/stock/vgk#NYSE">VGK</a>), which is not a dedicated eurozone fund, are off an average of one percent year-to-date and those ETFs have been an average of 150 basis points more volatile than HEDJ this year.
<bzrelatedlink>Related Link: <a href="https://www.benzinga.com/trading-ideas/long-ideas/16/10/8590023/etfs-delivering-dividend-growth-the-right-way">ETFs Delivering Dividend Growth The Right Way</a></bzrelatedlink>
With the euro faltering, HEDJ&#39;s tilt toward exporters is again paying dividends for investors.
&ldquo;It&rsquo;s also worth noting that many have been pleasantly surprised that markets have recovered from the lows they hit a few days after the surprise Brexit result. Since that point, the WisdomTree Europe Hedged Equity Index is up more than 13 percent, also outperforming these other benchmarks (MSCI EMU Index: up 12.3 percent; Euro Stoxx 50 Index: up 11.6 percent),&rdquo; said WisdomTree <a href="https://www.wisdomtree.com/blog/index.php/european-exporters-have-delivered-significant-outperformance-in-2016/">in a recent note</a>.
<h3>Methodology</h3>
Data suggest HEDJ&#39;s methodology works. Over the past three years, not only has HEDJ been slightly less volatile than the MSCI EMU Index, the WisdomTree ETF has outperformed that index by an almost 20-to-1 margin. That serves as a reminder of the unintended consequences of investors not acknowledging currency risk.
Additionally, as has been previously noted, HEDJ allocates just 13.1 percent of its weight to financial services stocks. That makes the sector the ETF&#39;s fourth-largest sector exposure, an advantage at a time when global investors are increasingly concerned about the strength of banks throughout some major eurozone economies.
&ldquo;Deutsche Bank, currently much maligned in the media, does not qualify as an exporter. Unicredit, Intesa Sanpaolo &mdash; these are also not exporters. In Europe at present, Financials are under stress, but for the most part companies in this sector do most of their business domestically, thereby not qualifying for the WisdomTree Europe Hedged Equity Index,&rdquo; added WisdomTree.
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Getting Reacquainted With An Old Europe ETF Friend

This year, &ldquo;allure&rdquo; and &ldquo;Europe ETFs&rdquo; probably do not belong in the same sentence. After all, investors have been tantalized by the prospect of more stimulus from the European Central Bank (ECB) only to be left disappointed and tormented by issues ranging from Brexit, Deutsche Bank AG (USA) (NYSE: <a class="ticker" href="/stock/db#NYSE">DB</a>)'s quasi-Lehman Brothers moment and the fragility of banking systems in major economies such as Italy.
Indeed, these are trying times for investors mulling European equities and the related exchange-traded funds, but these could also prove to be times during which investors wish they had scooped ETFs such as the WisdomTree Inter Hedged Eq Fund (NYSE: <a class="ticker" href="/stock/hedj#NYSE">HEDJ</a>).
<h3>A Little More About HEDJ</h3>
HEDJ tilts more toward dividend-paying eurozone exporters, a plus at a time when the euro remains vulnerable to further downside. Additionally, the ETF&#39;s less than 12 percent weight to financial services stocks is light compared to other ETFs. Three other sectors command larger weights in HEDJ than financial services.
<bzrelatedlink>Related Link: <a href="http://www.benzinga.com/trading-ideas/long-ideas/16/10/8523447/upon-further-inspection-this-is-an-impressive-em-etf">Upon Further Inspection, This Is An Impressive EM ETF</a></bzrelatedlink>
The third-largest, consumer discretionary, command&#39;s nearly 50 percent of HEDJ&#39;s weight than do bank stocks. Importantly, HEDJ features no exposure to troubled Deutsche Bank or Italian banking shares. Plus, eurozone equities are inexpensive.
&ldquo;For starters, while we say in the U.S. that stocks look expensive on a raw <a href="http://www.wisdomtree.com/blog/index.php/glossary/#Price-to-earnings%20%28P/E%29%20ratio">price-to-earnings (P/E)</a> multiple basis, a proper fair value model incorporates the discount rate to value future cash flows. Historically low <a href="http://www.wisdomtree.com/blog/index.php/glossary/#Interest%20rates">interest rates</a> in the U.S. suggest that U.S. equities are perhaps reasonably valued given the low discount rates that are central to market <a href="http://www.wisdomtree.com/blog/index.php/glossary/#Valuation">valuations</a>,&rdquo; said WisdomTree Research Director Jeremy Schwartz in <a href="https://www.wisdomtree.com/blog/index.php/why-earnings-trends-support-european-equities/?elqTrackId=0110e6b212f14086923693a013afd690&amp;elq=eb07052ba8d34f0eba5abb0ab2db5d1a&amp;elqaid=4064&amp;elqat=1&amp;elqCampaignId=1928">a recent note</a>. &ldquo;In Europe, the earnings multiples are even lower&mdash;and the resulting earnings <a href="http://www.wisdomtree.com/blog/index.php/glossary/#Yield">yields</a> higher&mdash; and the bond yields are even lower than those in the United States.&rdquo;
<h3>But Does It Work?</h3>
Data suggest HEDJ&#39;s methodology works. Over the past three years, not only has HEDJ been slightly less volatile than the MSCI EMU Index, the WisdomTree ETF has outperformed that index by an almost 20-to-1 margin. That serves as a reminder of the unintended consequences of investors not acknowledging currency risk.
With the Federal Reserve potentially nearing an interest rate hike before the end of this year, some U.S. companies could face a strong dollar headwind while their eurozone rivals could get the benefit of a weak euro tailwind, possibly lifting HEDJ in the process.
&ldquo;If the U.S. has this headwind that can continue to be a relative drag on earnings going forward and European markets have a bit of a tailwind for earnings, this could make the valuation argument even stronger and help make a case to look more positively on European equities,&rdquo; added Schwartz.
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The Allure Of Europe ETFs

The Guggenheim CurrencyShares Euro Trust (NYSE: <a class="ticker" href="/stock/fxe#NYSE">FXE</a>) is up 2.7 percent year-to-date and that is just one data point underscoring the difficult environment faced by equity-based Europe ETFs this year, particularly those of the currency-hedged variety.
Not surprisingly, the European Central Bank (ECB) is seen as the culprit behind euro strength and subsequent weakness for Europe ETFs such as the WisdomTree Europe Hedged Equity Fund (WisdomTree Inter Hedged Eq Fund (NYSE: <a class="ticker" href="/stock/hedj#NYSE">HEDJ</a>)). Last week, the ECB again disappointed investors by leaving its $1.9 trillion stimulus program unchanged. Perhaps making matters worse is the fact that ECB President Mario Draghi said the central bank <a href="http://www.wsj.com/articles/european-central-bank-leaves-rates-unchanged-1473335620">did not even consider</a> fresh stimulus. 
<h3>Rethinking The Situation</h3>
Still, reasons remain regarding why investors should not throw in the towel on Europe ETFs, not the least of which is more favorable pricing today than what was available a year ago. In the case of HEDJ, there is more to the story, including the ETF&#39;s underweight to the financial services, which is a plus in the current environment for eurozone equities.
<bzrelatedlink>Related Link: <a href="http://www.benzinga.com/analyst-ratings/analyst-color/16/09/8446414/here-are-8-key-market-moving-events-left-to-come-this-ye">Here Are 8 Key Market-Moving Events Left To Come This Year</a></bzrelatedlink>
Although some new reforms and regulations are seen as steps in the right direction for the eurozone&#39;s fractured banking systems, the time it takes for investors to realize the rewards of such efforts can be trying on their patience.
HEDJ&#39;s &ldquo;exporter tilt causes a significant under-weight in the Financials sector relative to cap weighting. Through 2016, we have seen this under-weight in Financials average roughly 8 percent. The WisdomTree Index has 0 percent exposure to Italian banks versus the 2 percent allocated by the MSCI EMU Index. To put the significance of these under-weights into perspective, year-to-date, European financials are down 14 percent, while Italian financials are down 37 percent measured in euros,&rdquo; according to a recent <a href="https://www.wisdomtree.com/blog/index.php/getting-smarter-in-your-european-allocation/"> WisdomTree note</a>.
Due to its emphasis on higher quality, dividend-paying exporters, financials account for just 12.7 percent of HEDJ&#39;s weight compared to weights of over 18 percent apiece for industrial and consumer staples names.
Data suggest HEDJ&#39;s methodology works. Over the past three years, not only has HEDJ been slightly less volatile than the MSCI EMU Index, the WisdomTree ETF has outperformed that index by an almost 20-to-1 margin. That serves as a reminder of the unintended consequences of investors not acknowledging currency risk.
&ldquo;While future movements in the European currency are hard to predict, our research suggests that taking currency risk in Europe is not advised over longer-term holding periods. Put another way, currency exposure in Europe is a source of risk with no expected long-term return,&rdquo; added WisdomTree.
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Reconsidering Europe ETFs

Options

Option Alert: SWEEP (SELL) - HEDJ July 24 $50.5 Call - 6000 @ 0.6 in 3 orders. 6000 traded. OI: 0

The Financial Select Sector SPDR Fund (NYSE: <a class="ticker" href="/stock/xlf#NYSE">XLF</a>) is down 5.6 percent year to date, which is one of the worst performances among the sector SPDR exchange-traded funds and one that serves as a reminder of the weakness in U.S. bank stocks.
European financial services names have not been anything to brag about either, as the iShares MSCI Europe Fincls Sctr Indx Fd (NASDAQ: <a class="ticker" href="/stock/eufn#NASDAQ">EUFN</a>) has been about 200 basis points worse than XLF. With woes for some of Germany&#39;s big banks to a borderline banking crisis in Italy, the eurozone&#39;s third-largest economy, it is not surprising the region&#39;s <a href="http://www.benzinga.com/news/16/03/7652567/no-bella-for-the-italy-etf">financial services stocks</a> are struggling.
<bzrelatedlink>Related Link: <a href="http://www.benzinga.com/markets/eurozone/16/03/7684049/europe-and-the-central-role-of-central-banks">Europe And The Central Role Of Central Banks</a></bzrelatedlink>
<h3>Looking To The Eurozone With Minimal Exposure To Banking</h3>
Nor is it surprising that some investors would like to maintain exposure to eurozone equities without too much of that exposure going to bank stocks. The WisdomTree Inter Hedged Eq Fund (NYSE: <a class="ticker" href="/stock/hedj#NYSE">HEDJ</a>), 2015&#39;s top asset-gathering ETF, can help with that objective.
Although some new reforms and regulations are seen as steps in the right direction for the eurozone&#39;s fractured banking systems, the time it takes for investors to realize the rewards of such efforts can be trying on their patience.
&ldquo;Therefore, during times of market stress, the worst is assumed until rumors can be thoroughly disproven. To start 2016, new &#39;<a href="http://www.wisdomtree.com/blog/index.php/glossary/#Bail%20in">bail-in</a>&#39; provisions have been put into effect in the eurozone. Under these measures, private sector creditors will be forced to absorb losses during bank failures before government funds are made available.
&ldquo;While these policies may serve as an important step in limiting &#39;too big to fail,&#39; some questions remain about their operations during periods of crisis,&rdquo; said WisdomTree <a href="http://www.wisdomtree.com/blog/index.php/eurozone-financials-half-empty-or-half-full/">in a recent note</a>.
<h3>Allocations And Holdings</h3>
HEDJ allocates 10.1 percent of its weight to financial services stocks, putting that sector in a tie with healthcare as the ETF&#39;s fourth-largest sector weight. However, that 10.1 percent is easily outpaced by the 18.6 percent the ETF devotes to consumer discretionary names, its third-largest sector allocation.
HEDJ&#39;s top 10 holdings feature two Spanish bank stocks, but, fortunately, the ETF&#39;s overall Italy allocation is light at less than 2 percent. Additionally, big-name German and French bank costs, many of which have recently experienced boosts to their borrowing costs, play minimal parts in determining HEDJ&#39;s fate.
&ldquo;Complicating matters further, these concerns are not limited to small, regional players on the periphery. Given the propensity for large banks to originate loans across the monetary union (often at higher rates), mega-cap financials like Deutsche Bank, UniCredit and BNP Paribas have seen borrowing costs climb as equity markets fell in recent weeks. While regulators appear confident in public that the recovery remains on track, the uncertainty is clearly causing some investors to derisk their portfolios and ask questions later,&rdquo; added WisdomTree.
Consumer staples and industrials combine for over 41 percent of HEDJ&#39;s weight.
Disclosure: Todd Shriber owns shares of XLF.
Image Credit: <a href="https://pixabay.com/en/eu-european-commission-brussels-1232430/">Public Domain</a>

iShares MSCI Europe Financials Sector Index Fund

EUFN

A Popular Eurozone ETF That Dodges Bank Stocks

Global equity markets have stumbled to start 2016, placing a great premium on asset allocation for advisors and investors. Some exchange-traded funds aim to ameliorate the asset allocation issue, but are limited to doing so <a href="http://www.benzinga.com/trading-ideas/long-ideas/15/10/5933532/focus-5-etf-focuses-on-massive-asset-growth">at the sector level</a>.

	ETFs that have the ability to navigate investors into sturdy sectors and away from those groups are flailing are certainly useful, and some of these funds have proven undoubtedly successful. However, investors can get more. More exposure to more assets, that is, with the SPDR SSGA Global Allocation ETF (SSGA Actice ETF Trust (NYSE: <a class="ticker" href="/stock/gal#NYSE">GAL</a>)).

	<bzrelatedlink>Related Link: <a href="http://www.benzinga.com/trading-ideas/long-ideas/16/01/6161729/shorts-love-this-etfs-holdings">Shorts Love This ETF&#39;s Holdings</a></bzrelatedlink>
<h3>
	A Closer Look At GAL</h3>

	The $182.7 million SPDR SSGA Global Allocation ETF, which turns four in late April, is an ETF of ETFs, meaning 17 of its 18 holdings are all other ETFs.

	&ldquo;Sector rotation strategies can help investors align investments with their market outlook and position a portfolio to get more from the core. These strategies can take many forms. For instance, in a top-down approach, an investor can underweight or overweight a sector based on market and macroeconomic views such as rising rates or a resilient consumer. Using a bottom-up approach, an investor can underweight or overweight based on a sector&rsquo;s fundamentals or momentum characteristics,&rdquo; said State Street Global Advisors (SSgA) Vice President David Mazza <a href="http://blog.spdrs.com/post/how-to-implement-sector-and-industry-strategies-sector-investing-series-part-3">in a recent note</a>.

	An important element to GAL&#39;s methodology is that it the ETF is not required to be fully invested in stocks or bonds at all times. At the moment, nearly 17 percent of GAL&#39;s weight is allocated to cash. Over the past month, GAL is down 6.5 percent, while the MSCI All Country World Index is down 9.3 percent over the same period.

	GAL&#39;s largest holdings include the SPDR S&amp;P 500 ETF Trust (NYSE: <a class="ticker" href="/stock/spy#NYSE">SPY</a>), WisdomTree Inter Hedged Eq Fund (NYSE: <a class="ticker" href="/stock/hedj#NYSE">HEDJ</a>), Health Care SPDR (ETF) (NYSE: <a class="ticker" href="/stock/xlv#NYSE">XLV</a>) and the SPDR Barclays Capitl Intrmdt Trm Trs ETF (NYSE: <a class="ticker" href="/stock/ite#NYSE">ITE</a>). GAL&#39;s other sector exposures include consumer discretionary and technology.

	&ldquo;In this current market environment, roughly half of the US large-cap portion of GAL is invested in a traditional US large-cap core exposure via the SPDR S&amp;P 500 ETF. The remainder of the US large-cap exposure is allocated equally, using a sector rotation model across three sectors we favor based on their outlook from a valuation, momentum and sentiment perspective,&rdquo; added Mazza.

	Nearly 23 percent of GAL&#39;s current lineup is allocated to bonds. Though GAL appears to have some of the advantages of an actively managed product, it is a passively managed fund with a reasonable annual fee of 0.35 percent, which is low compared to some sector allocation ETFs.

	Image Credit: <a href="https://pixabay.com/en/domino-hand-stop-corruption-665547/">Public Domain</a>

Bonds

Intraday Update

A One-Stop ETF For Asset Allocation Strategies

To the surprise of few who follow the industry, exchange traded funds notched another exceptional year of adding assets in 2015. By BlackRock Inc.&nbsp;(NYSE: <a class="ticker" href="/stock/blk#NYSE">BLK</a>)&#39;s count, exchange traded products added $347 billion on a global basis last year.

	New York-based BlackRock <a href="http://www.benzinga.com/trading-ideas/long-ideas/16/01/6108951/ishares-wins-2015-race-for-global-etf-inflows#/null">garnered $130 billion of the $347 billion</a> that flowed into exchange-traded products last year. BlackRock, the world&#39;s largest asset manager, is the parent company of iShares, the world&#39;s largest ETF sponsor.

	&quot;U.S. ETFs gathered $40 billion in the month of December, driving the full year inflows to $242 billion, according to&nbsp;data&nbsp;from etf.com. In 2015, international equity ETFs added more than $109 billion of fresh money while U.S. equity and U.S. fixed income offerings added $61 billion and $56 billion, respectively. S&amp;P Capital IQ thinks this is impressive as the U.S. equity market was down fractionally on a price basis for the year,&quot; said <a href="http://trymsatoday.com/">S&amp;P Capital IQ</a> in a new research note.
<h3>
	Prominent Theme(s)</h3>

	As Benzinga noted on Tuesday, five of last year&#39;s top 10 asset-gathering ETFs were iShares funds. Another prominent theme last year was investors favoring international equity ETFs, a trend that benefited currency hedged ETFs, such as the WisdomTree Europe Hedged Equity ETF (NYSE: <a class="ticker" href="/stock/hedj#NYSE">HEDJ</a>) and the Deutsche X-trackers MSCI EAFE Hedged Equity (NYSE: <a class="ticker" href="/stock/dbef#NYSE">DBEF</a>). HEDJ was the top asset-gathering ETF last year while only two funds added <a href="http://www.benzinga.com/trading-ideas/long-ideas/15/12/6024693/these-currency-hedged-etfs-could-enjoy-2016">more new assets than DBEF</a>.

	Related Link: <a href="http://www.benzinga.com/trading-ideas/long-ideas/16/01/6108948/a-glum-view-on-a-high-flying-sector">A Glum View On A High-Flying Sector</a>

	WisdomTree Investments Inc. (NASDAQ: <a class="ticker" href="/stock/wetf#NASDAQ">WETF</a>), &quot;the fifth-largest provider, gathered $16 billion in 2015, the third most in the growing industry. Approximately 82% of WETF&rsquo;s asset growth came from demand for its popular HEDJ. S&amp;P Capital IQ has research on 81 other ETFs offered by WisdomTree including some strong U.S. dividend ETFs, but the firm&rsquo;s success has recently been driven by interest in currency hedged European assets,&quot; said S&amp;P Capital IQ.

	Vanguard, the second-largest U.S. ETF sponsor, was last year&#39;s No. 2 asset gather as the Vanguard S&amp;P 500 ETF (NYSE: <a class="ticker" href="/stock/voo#NYSE">VOO</a>) and the Vanguard Total Stock Market ETF(NYSE: <a class="ticker" href="/stock/vti#NYSE">VTI</a>) combined to add over $20 billion in new assets. Overall, ETFs issued by Pennsylvania-based Vanguard took in $76.4 billion in new assets last year, according to S&amp;P Capital IQ.

	The ETF industry has been torrid asset-gathering pace, having doubled in size between 2011 and 2014. On the surface, it would appear such a pace would be difficult to maintain. However, some industry insiders believe another double is on the way.

	&quot;Last month, SNL Financial&rsquo;s Matt MacFarland wrote that BlackRock President Robert Kapito said the ETF market &ldquo;in the next three to four years is going to double in size&rdquo;, drawing a comparison between the rise in ETFs and that of mutual funds in the 1970s,&quot; according to S&amp;P Capital IQ.

DBEF

WETF

Strongest Of The Strong: Another Big Year For The ETF Industry

Several years ago, currency-hedged exchange-traded funds were viewed as niche concepts. These days, ETFs that provide equity exposure while profiting from the dollar&#39;s strength against currencies ranging from the euro to the yen and many more are mainstream.
Led by the WisdomTree Inter Hedged Eq Fund (NYSE: <a class="ticker" href="/stock/hedj#NYSE">HEDJ</a>) and the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (DBX ETF Trust (NYSE: <a class="ticker" href="/stock/dbef#NYSE">DBEF</a>)), currency-hedged ETFs are among this year&#39;s most prolific asset gatherers, extending the rapid growth of this ETF genre. Year-to-date, HEDJ and DBEF are the top two asset-gathering ETFs with combined inflows of over $27.5 billion.
Those figures suggest advisors and investors are embracing currency-hedged ETFs at a fevered pace. Staggering growth for HEDJ, DBEF and other currency-hedged ETFs confirm that these funds can in fact be cornerstones of well-diversified portfolios.
<bzrelatedlink>Related Link: <a href="http://www.benzinga.com/trading-ideas/long-ideas/15/12/6024693/these-currency-hedged-etfs-could-enjoy-2016">These Currency-Hedged ETFs Could Enjoy 2016</a></bzrelatedlink>
<h3>Currency-Hedged ETFs</h3>
Currency-hedged ETFs &ldquo;use currency forwards to hedge their foreign-currency exposure, and this cost to hedge can be roughly estimated as the difference in short-term rates between the U.S. dollar and a foreign currency. During the last five years, the cost to hedge (by using forwards) has been very small, averaging about 10 basis points a year,&rdquo; according to a recent <a href="http://news.morningstar.com/articlenet/article.aspx?id=733408">Morningstar</a> note.
DBEF follows the MSCI EAFE US Dollar Hedged Index. Importantly, DBEF has been superior on a <a href="http://www.benzinga.com/analyst-ratings/analyst-color/15/10/5881636/a-king-among-currency-hedged-etfs">risk-adjusted basis</a> as well.
Diverging developed market monetary policies increase DBEF&#39;s allure. Some investors are still betting the Fed will again raise interest rates in the coming months, perhaps as soon as this month. Conversely, the Bank of Japan and the European Central Bank are seen as having the room to add to their already massive easing programs. Combined, Japan and the eurozone account for over 45 percent of DBEF&#39;s geographic weight.
<h3>Other Currency-Hedged Funds To Watch</h3>
DBEF has easily outpaced traditional EAFE funds this year. In addition to HEDJ and DBEF, some other currency hedged ETFs could shine next year as developed market monetary policies continue diverging. If the Bank of England moves to pare rates, the Deutsche X-Trackers MSCI United Kingdom Hedged Equity ETF (DBX ETF Trust (NYSE: DBUK)) and the WisdomTree United Kingdom Hedged Equity Fund (WisdomTree Trust (NASDAQ: <a class="ticker" href="/stock/dxps#NASDAQ">DXPS</a>)) could shine.
Previously, currency traders believed the Bank of England would be one of the first developed market central banks after the<a href="http://www.benzinga.com/analyst-ratings/analyst-color/15/10/5881636/a-king-among-currency-hedged-etfs"> Federal Reserve</a> to raise interest rates, but wagers to that effect have dwindled. Now, with the Fed poised to raise rates and the Bank of England on hold, calling for further pound weakness is not a stretch. However, <a href="http://www.benzinga.com/trading-ideas/long-ideas/15/12/6024693/these-currency-hedged-etfs-could-enjoy-2016">that does not mean</a> DBUK and DXPS are sure things heading into 2016.
<h3>The Complicated Nature Of Hedging</h3>
&ldquo;Currency-hedged ETFs use currency forwards to hedge their foreign-currency exposures, and there are tax issues related to these derivatives contracts. Currency-hedged funds must distribute to fundholders the gains on currency forwards, which are taxed at a combination of long-term and short-term capital gains rates (60 percent long-term and 40 percent short-term).
&ldquo;During periods when the U.S. dollar is rising against hedged currencies, the monthly roll of these currency contracts can result in capital gains,&rdquo; added Morningstar.
Image Credit: <a href="https://pixabay.com/en/europe-pay-usa-banknote-business-69527/">Public Domain</a>

Federal Reserve

DXPS

Portfolio Building With Currency-Hedged ETFs

Broadly speaking, this has been a banner year for currency hedged exchange-traded funds. If they were not already, currency hedged ETFs have gone mainstream thanks in large part to the fact that no ETFs have matched the asset-gathering proficiency of the WisdomTree Inter Hedged Eq Fund (NYSE: <a class="ticker" href="/stock/hedj#NYSE">HEDJ</a>) or the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (DBX ETF Trust (NYSE: <a class="ticker" href="/stock/dbef#NYSE">DBEF</a>)) this year.
As their names imply, HEDJ and DBEF are multi-country funds. Looking at single-country currency hedged ETFs, particularly when excluding Japan funds, reveals varying degrees of success. For example, this has been a trying year for U.K. ETFs that hedge pound/dollar risk.
<bzrelatedlink>Related Link: <a href="http://www.benzinga.com/trading-ideas/long-ideas/15/11/5976375/flexshares-enters-currency-hedged-etf-fray">FlexShares Enters Currency Hedged ETF Fray</a></bzrelatedlink>
	Despite the fact that the CurrencyShares British Pound Sterling Trust (Guggenheim CurrencyShares British (NYSE: <a class="ticker" href="/stock/fxb#NYSE">FXB</a>)) has lost 3.3 percent year-to-date, the Deutsche X-Trackers MSCI United Kingdom Hedged Equity ETF (DBX ETF Trust (NYSE: DBUK)) and the WisdomTree United Kingdom Hedged Equity Fund (WisdomTree Trust (NASDAQ: <a class="ticker" href="/stock/dxps#NASDAQ">DXPS</a>)) are off an average of 5.7 percent.
<h3>Looking Into The New Year</h3>
There are indications that 2016 could bring better tidings for DBUK and DXPS, including FXB&#39;s 90-day loss of nearly 2 percent. Sterling's recent bout of weakness has some market observers calling for much more of the same next year.
&ldquo;With a prediction the pound will weaken a further 15 percent by the end of next year, Deutsche Bank AG is among the biggest skeptics. The second-largest foreign-exchange trader sees sterling sliding to a level unseen since 1985, the year the Plaza Accord was signed,&rdquo; according to <a href="http://www.bloomberg.com/news/articles/2015-12-03/pound-headed-to-30-year-low-for-deutsche-bank-as-risks-multiply">Bloomberg</a>.
<h3>Central Banking Influence</h3>
Previously, currency traders believed the Bank of England would be one of the first developed market central banks after the<a href="http://www.benzinga.com/analyst-ratings/analyst-color/15/10/5881636/a-king-among-currency-hedged-etfs"> Federal Reserve</a> to raise interest rates, but wagers to that effect have dwindled. Now, with the Fed poised to raise rates and BoE on hold, calling for further pound weakness is not a stretch. However, that does not mean DBUK and DXPS are sure things heading into 2016.
<h3>DBUK And DXPS Into 2016</h3>
Both ETFs could use a rebound in oil prices, which does not appear likely to materialize, to move higher. DBUK has an almost 13 percent weight to the energy sector, while DXPS devotes 15.8 percent of its weight to energy stocks. In both cases, Royal Dutch Shell plc (ADR) (NYSE: <a class="ticker" href="/stock/rds-a#NYSE">RDS-A</a>) and BP plc (ADR) (NYSE: <a class="ticker" href="/stock/bp#NYSE">BP</a>) are major holdings.
Other names in both ETFs that U.S. investors are likely to be familiar with due to New York listings include AstraZeneca plc (ADR) (NYSE: <a class="ticker" href="/stock/azn#NYSE">AZN</a>), HSBC Holdings plc (ADR) (NYSE: <a class="ticker" href="/stock/hsbc#NYSE">HSBC</a>) and Vodafone Group Plc (ADR) (NASDAQ: <a class="ticker" href="/stock/vod#NASDAQ">VOD</a>).
<bzrelatedlink>Related Link: <a href="http://www.benzinga.com/trading-ideas/long-ideas/15/11/5979123/fed-preparation-with-currency-hedged-etfs">Fed Preparation With Currency Hedged ETFs</a></bzrelatedlink>
 Still, DBUK and DXPS are responsive to pound weakness. As FXB has slid lower over the past three months, the two currency hedged ETFs are up an average of 3.2 percent over that period. The pair could also rally into year-end if options traders are correct.
&ldquo;Options also suggest the pound will extend its 4 percent decline versus the greenback this year. The difference between the cost of three-month contracts allowing traders to sell the pound versus the dollar and those to buy widened to a five-month high of 0.88 percentage point, from as little as 0.26&nbsp;percentage point in mid-October,&rdquo; according to Bloomberg.
Image Credit: <a href="https://pixabay.com/en/coins-money-ruble-salary-map-990693/">Public Domain</a>

Short Ideas

CurrencyShares British Pound Sterling Trust

HSBC

RDS-A

These Currency Hedged ETFs Could Enjoy 2016

Advisors and investors are hearing plenty about the growth of smart or strategic beta exchange-traded funds. New data confirm these ETFs, which toe the line between active and passive management, are growing at a blistering pace.
<a href="http://www.benzinga.com/trading-ideas/long-ideas/15/09/5871033/the-survey-says-advisors-love-smart-beta-etfs">According to FTSE Russell&rsquo;s</a> first U.S. retail financial advisor market survey "<a href="http://www2.londonstockexchangegroup.com/advisor-smart-beta-survey">Smart Beta:</a> 2015 survey findings from U.S. financial advisors," 68 percent of financial advisors polled are using smart beta ETFs and 70 percent are using multiple strategic beta approaches.
<a href="http://www2.londonstockexchangegroup.com/advisor-smart-beta-survey">A recent survey</a> by Create-Research found that smart beta ETFs account for <a href="http://www.etftrends.com/2015/08/rapid-growth-in-the-smart-beta-index-etf-space/">over $300 billion</a>, or 18 percent of the U.S. ETF market, by far the largest ETF market in the world.
<bzrelatedlink>Related Link: <a href="http://www.benzinga.com/trading-ideas/long-ideas/15/11/6006877/going-shopping-with-an-emerging-markets-consumer-etf">Going Shopping With An Emerging Markets Consumer ETF</a></bzrelatedlink>
<h3>Strategic, Smart Beta ETFs</h3>
Exponential growth for strategic beta ETFs has continued in 2015 despite outflows from some dividend ETFs. Dividend ETFs had previously been the primary drivers of smart beta growth, but that has changed this year. Advisors and investors have pulled assets from some marquee dividend ETFs due to speculation the Federal Reserve is close <a href="http://www.benzinga.com/trading-ideas/long-ideas/15/08/5774526/utilities-resurgence-helps-some-dividend-etfs-inflows-a-diffe">to raising interest rates</a> for the first time in nine years.
&ldquo;Smart Beta equity ETFs/ETPs listed globally gathered US$ 3.0 billion in new assets in October and US$ 53.7 billion in the first 10 months of 2015. There were 764 smart beta equity ETFs/ETPs, with 1,336 listings, assets of US$399 billion, from 106 providers listed on 31 exchanges in 27 countries, according to ETFGI&rsquo;s new report the Global Smart Beta ETF and ETP Insights report for October 2015,&rdquo; <a href="http://etfgi.com/news/detail/newsid/758">according to ETFGI</a>, a London-based ETF research firm.
Excluding two currency hedged ETFs &ndash; WisdomTree Inter Hedged Eq Fund (NYSE: <a class="ticker" href="/stock/hedj#NYSE">HEDJ</a>) and the DBX ETF Trust (NYSE: <a class="ticker" href="/stock/dbef#NYSE">DBEF</a>) &ndash; the rest of this year&#39;s top asset-gathering equity ETFs are cap-weighted funds. However, there are plenty of examples of factor-based and smart beta ETFs packing on the assets. 
<h3>Factor-Based, Smart Beta ETFs</h3>
That group includes the WisdomTree U.S. Quality Dividend Growth Fund (WisdomTree Trust (NASDAQ: <a class="ticker" href="/stock/dgrw#NASDAQ">DGRW</a>)), iShares MSCI USA Momentum Factor ETF (iShares Trust (NYSE: <a class="ticker" href="/stock/mtum#NYSE">MTUM</a>)) and new funds such as the PowerShares DWA Tactical Sector Rotation Portfolio (NASDAQ: <a class="ticker" href="/stock/dwtr#NASDAQ">DWTR</a>). DWTR has needed less than two months of trading to become an <a href="http://www.benzinga.com/trading-ideas/long-ideas/15/11/5954100/some-momo-from-a-new-momentum-etf"> $84 million ETF</a>. 
&ldquo;Products which are categorised as smart beta based only on the fact that the index uses an alternative weighting methodology have $22.7 billion assets across 84 products, while those utilising volatility screens such as filtering for securities with low volatility have 63 products and $26.4 billion assets. There were also 28 products based on momentum strategies with $10.6 billion assets,&rdquo; according to ETFGI.
WisdomTree Investments, Inc. (NASDAQ: <a class="ticker" href="/stock/wetf#NASDAQ">WETF</a>) is the top asset gatherer among smart issuers year-to-date, followed by iShares, the world&#39;s largest issuer of ETFs. 
The author owns shares of DGRW.
Image Credit: <a href="https://pixabay.com/en/macbook-laptop-computer-office-924157/">Public Domain</a>

Dividends

DGRW

DWTR

MTUM

Smart Beta ETFs Are Growing At A Staggering Pace

Over the past month, the PowerShares DB US Dollar Index Bullish (NYSE: <a class="ticker" href="/stock/uup#NYSE">UUP</a>) has gained nearly 5 percent, while the Guggenheim CurrencyShares Euro Trust (NYSE: <a class="ticker" href="/stock/fxe#NYSE">FXE</a>) has tumbled by more than 6 percent.
	Those performances have been aided by rising expectations that the Federal Reserve will raise interest rates next month, accompanied by views that the European Central Bank (ECB) is preparing to add to its quantitative easing package rolled out earlier this year.
<bzrelatedlink>Related Link: <a href="http://www.benzinga.com/trading-ideas/long-ideas/15/11/5992887/wisdomtree-adds-to-currency-hedged-suite-with-small-cap-divid">WisdomTree Adds To Currency-Hedged Suite With Small-Cap Dividend ETF</a></bzrelatedlink>
 In other words, investors may be looking at another perfect storm for currency-hedged exchange-traded funds that benefit when the euro weakens against the dollar, such as the WisdomTree Inter Hedged Eq Fund (NYSE: <a class="ticker" href="/stock/hedj#NYSE">HEDJ</a>).
<h3>A Closer Look At 2015's Top Asset Gathering ETF</h3>
HEDJ, this year&#39;s top asset-gathering ETF, has surged more than 8 percent over the past month and has added $587.3 million in new assets during the current quarter.
 Still, it has been widely noted that long dollar is a <a href="http://www.benzinga.com/trading-ideas/long-ideas/15/11/5985129/race-to-the-bottom-for-european-currency-etfs">crowded, potentially vulnerable trade</a> heading into the Fed meeting next month.
&ldquo;The most crowded and vulnerable trade heading into the December Fed meeting is going long on the U.S. dollar, according to Bank of America global fund manager survey results published November 17. The euro has already tumbled 11 percent this year to near parity &ndash; about $1.07. And currency volatility has now subsided to the 10-year average, stability that contrasts with a barrage of policy moves that shocked markets earlier in the year: The removal of the Swiss franc&rsquo;s peg in January and China&rsquo;s yuan devaluation in August,&rdquo; reported <a href="http://www.newsmax.com/Finance/StreetTalk/ETF-investing-Europe-market/2015/11/20/id/703003/">Bloomberg</a>.
<bzrelatedlink>Related Link: <a href="http://www.benzinga.com/trading-ideas/long-ideas/15/11/5976375/flexshares-enters-currency-hedged-etf-fray">FlexShares Enters Currency-Hedged ETF Fray</a></bzrelatedlink>
That does not obfuscate the fact that HEDJ has surged 13.2 percent year-to-date compared to a barely noticeable 1.2 percent for the unhedged Vanguard FTSE Europe ETF (NYSE: <a class="ticker" href="/stock/vgk#NYSE">VGK</a>).
<h3>HEDJ's Small-Cap Counterpart: EUSC</h3>
In the current environment of diverging developed world central bank monetary policies, investors would do well to not overlook HEDJ&#39;s small-cap counterpart, the WisdomTree Europe Hedged SmallCap Equity Fund (NYSE: <a class="ticker" href="/stock/eusc#NYSE">EUSC</a>).
EUSC debuted in March and is now home to nearly $246 million in assets under management &ndash; making it one of the most successful new ETFs to come to market this year. The rookie ETF has had some rough patches, but it is responsive, as it should be, to euro weakness.
 An almost 5 percent gain <a href="http://www.benzinga.com/trading-ideas/long-ideas/15/10/5879071/delving-deeper-into-strategic-beta-etfs">over the past month</a> confirms as much.
EUSC&#39;s largest country weight is 21 percent to Italy, one of the largest weights to that country among any ETF that is not an Italy-specific fund. The ETF&#39;s nearly 240 components &ldquo;are weighted in the Index based on annual cash dividends paid with the following caps: maximum individual position capped at 2 percent, maximum sector weight capped at 25 percent, and maximum country weight capped at 25 percent,&rdquo; <a href="http://www.wisdomtree.com/etfs/fund-details.aspx?etfid=107">according to WisdomTree</a>.
Image Credit: <a href="hhttps://pixabay.com/en/money-dollar-cents-euro-euro-cent-837376/">Public Domain</a>