A Smart ETF Play On A Dependable European Market

Among developed market currencies, the euro is disappointing investors. Disappointing because many investors were betting various monetary stimulus efforts by the European Central Bank (ECB) would serve to weaken the common currency, but nearly eight months into 2016, the Guggenheim CurrencyShares Euro Trust FXE is up 3.4 percent.

The Euro, The Eurozone And ETFs

However, the onslaught of negative sentiment endured by eurozone ETFs could be making the asset class under-appreciated while presenting prescient investors with a buying opportunity. Additionally, eurozone economic data is not as bad as many U.S. investors think it is.

Even with the euro being somewhat sturdy year-to-date, in local currency terms, some of the eurozone's major equity markets are essentially flat. Still, there are problem spots throughout the region. Italy, the eurozone's third-largest economy comes to mind. Saddled with one of the world's worst debt-to-GDP ratios and an increasingly fragile banking system, Italy is widely cited as the eurozone's current problem child, potentially on par with Greece several years ago.

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Problem areas underscore the validity of a tactical approach to European equities via single-country ETFs such as the WisdomTree Germany Hedged Equity Fund DXGE. DXGE's underlying index, the WisdomTree Germany Hedged Equity Index, is higher year-to-date (as of August 15), an impressive feat considering the euro has also traded higher against the U.S. dollar.


Germany, the eurozone's largest economy, remains one of the region's most desirable investment destinations.

“As the locomotive of Europe, Germany and its exporters continue to benefit from relatively strong consumer spending in the U.S. and from global gross domestic product (GDP) growth that continues to outpace GDP growth in Europe,” said WisdomTree Chief Investment Officer Luciano Siracusano in a recent note.

Not only is DXGE levered to the weak euro and German exporters theme via its euro hedge, but also by its sector allocations. For example, export-heavy German consumer discretionary and industrial names combine for 39.5 percent of the ETF's weight. That is an overweight to those two sectors of about 650 basis points relative to the MSCI Germany Index.

“Germany has certainly been a bright spot in the eurozone over the last decade, especially if one hedged the currency. Hedging the euro allows WisdomTree’s Index to mitigate currency risk, while titling toward exporters gives WisdomTree the potential to capitalize on a depreciating euro. Should upcoming elections in Europe cause the euro to weaken, such a hedge could once again represent a source of return for the strategy,” added Siracusano.

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