Guten Morgen! Good Times For Germany ETFs

Even with the euro trading slightly higher against the dollar, a scenario that can pinch the export-driven German economy, the iShares MSCI Germany Index Fund (ETF) EWG is up. Year-to-date, EWG, the largest Germany ETF trading in New York, is higher by about 7 percent. That puts EWG mostly in line with the returns of the iShares MSCI Eurozone ETF EZU.

Hallo, Deutschland; Hallo, HEWG

German stocks account for nearly 30 percent of EZU's weight, making it the ETF's second-largest geographic exposure behind France.

Although the euro has been modestly stronger against the greenback, EWG's currency hedged equivalent, the iShares Currency Hedged MSCI Germany ETF HEWG is up 6.8 percent year-to-date. Investors are taking note of HEWG's performance.

HEWG “has seen more than $225 million in assets enter the fund lately, building its asset base above the $710 million mark presently, and making it the second largest Germany Equity fund in the ETF landscape by a comfortable margin above the next largest alternative in the segment,” said Street One Financial Vice President Paul Weisbruch in a note out Wednesday.

The Differences (And Similarities) Between HEWG And EWG

HEWG is EWG with currency hedged overlay, meaning HEWG's only equity holding is actually EWG. The ETF uses currency forwards and other instruments to manage euro/dollar risk. Like EWG, HEWG allocates about a third of its combined sector weight to consumer discretionary and financial services stocks. Materials and industrials combine for over 28 percent.

A risk for HEWG is that many market observers expect the euro to strengthen assuming favorable outcomes in the upcoming French and German elections. If Marine Le Pen is defeated in France, it is likely the common currency will rally.

“The recent popularity of HEWG in terms of inflows has lifted the fund’s daily trading volume on a one-month trailing basis to above 663,000, shares whereas the trailing three-month figure is 436,000 shares,” said Weisbruch. “The euro currency itself has had a relatively difficult time against the U.S. dollar since the end of March, retreating more than 2.6 percent to present levels in this time frame, so it certainly seems that the buyers in HEWG are comfortable with adding exposure to the German equity market here — but at the same time they are likely hesitant to embrace a falling Euro and the potential effects that may have on overall returns in that market.”

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