Credit: Shutterstock photoH ints Thursday of more stimulus efforts out of Europe could be just what exchange traded funds holding European stocks need. Such a move should drive the euro down vs. the dollar.
And drive up ETF investors' hunger for "currency hedged" strategies that tend to get a boost from a stronger greenback.
"While the appeal of currency hedging slowed in early 2016 amid global economic concerns, recent comments from the ECB (European Central Bank) may spark interest," Todd Rosenbluth, director of ETF research at S&P Capital IQ, wrote in a Jan. 21 press note.
Currency-hedged international ETFs absorbed $45 billion in new money in 2015, he added, citing data from State Street Global Advisors.
Unhedged international equity ETFs added $59 billion.
Several ETFs offer exposure to Europe and eurozone stocks, including the flagship $13.42 billionVanguard FTSE Europe ( VGK ).
They proved a hit with investors in 2015, as the region embarked on a massive quantitative easing (QE) program.
In Frankfurt on Thursday, ECB President Mario Draghi indicated that more easing may be on its way. He cited downside risk from a bleak outlook for emerging markets.
Talk of more QE is good for the region's stocks, but bad for the euro. Monetary stimulus tends to weaken a currency. Meanwhile, monetary tightening in the U.S. should lift U.S. interest rates and the dollar.
That could burnish the appeal of currency-hedged Europe-focused ETFs for successful investing . Hedged equity strategies give investors the return of the foreign stock portfolio, while reducing exchange-rate risk.
In effect, U.S. investors get a more "pure" return that reflects the return of the local market.
Hedging Europe
However, the popular hedged Europe ETFs are not all the same, cautions Rosenbluth.
"Investors need to look inside to understand the country and sector exposures they provide," he added.
WisdomTree Europe Hedged Equity ( HEDJ ) is a top performer in its category. HEDJ gained an average annual 5% over the past five years vs. 1.4% for VGK.
This hedged ETF has its biggest stakes in Germany (26% portfolio weighting), France (27%), the Netherlands (15%) and Spain (14%).
By comparison,Deutsche X-trackers MSCI Europe Hedged Equity ( DBEU ) has its biggest exposure to the U.K. (30% weighting). Switzerland is at 14%.
HEDJ has virtually no allocation to the U.K. or Switzerland.
Meanwhile,iShares Currency Hedged MSCI Eurozone ( HEZU ) has country exposure similar to HEDJ's. But Germany and France account for more (30% and 32% weighting, respectively), Spain for less (11%).
The three ETFs also vary from a sector point of view. Both DBEU and HEZU focus primarily on financials.
But DBEU has more in consumer staples, such as top stock Nestle. HEZU has more in consumer discretionary stocks.
Neither of these two ETFs has a five-year history. They rose on the stock market today , along with VGK and HEDJ.
Follow Aparna Narayanan on Twitter @IBD_ANarayanan .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
