Choosing The Best Europe ETF

November 20, 2013

Currency-Hedged Or Not?

The largest broad Europe-focused currency-hedged ETF is currently the $508.7 million WisdomTree Europe Hedged Equity Fund (HEDJ | D-39). That said, HEDJ only targets eurozone nations and neutralizes its exposure to the euro through shorting currency futures and forward contracts.

But perhaps the real twist with HEDJ is that it heavily tilts toward exporters by screening out any companies that don’t get more than 50 percent of their revenues from outside Europe. So this is a fund that benefits from the eurozone’s exporting prowess, rather than domestic demand.

If you prefer currency-hedged exposure to all of Europe as opposed to the eurozone, the db X-trackers MSCI Europe Hedged Equity Fund (DBEU) is the best available option. Still, the fund is still fairly new, has only $7.9 million in assets and trades $36,000 worth of shares a day, so that’s something to consider when placing trades in DBEU.

Tying It All Together

Here at IndexUniverse, VGK gets our “Analyst Pick” nod for the European market. The fund offers the most representative beta exposure to Europe at a reasonable cost—it costs only 12 basis points ($12 for each $10,000 invested); trades more than $230 million a day; and follows a straight, cap-weighted selection and weighting scheme.

From a currency-exposure perspective, VGK goes beyond eurozone nations, so it also has exposure to the pound sterling, Swiss franc, Swedish krone and Danish krone.

This compares with EZU, which also has fantastic liquidity, but charges 53 basis points. While EZU is a good, albeit costly, choice for those wanting only eurozone exposure, be mindful that it completely misses out on some of Europe’s largest non-EMU companies, such as Nestle, HSBC Holdings, Roche, Novartis, BP, Vodafone and GlaxoSmithKline.

While currency-hedged exposure has been the rage during the past year due to the popularity of the $11.1 billion WisdomTree Japan Hedged Equity Fund (DXJ | B-45), in Europe, currency-hedged products have actually lagged behind their nonhedged peers due to the rise in the euro.

While the dollar has been in favor in recent months due to Fed tapering fears, it seems with regard to Europe that there’s been a relief rally in the euro from the easing of fears from any systemic breakdown in the euro currency.

Looking at fund returns year-to-date, it’s no coincidence that eurozone funds like EZU have outperformed broader Europe funds like VGK this year, with the euro gaining against the dollar. EZU has also outperformed the currency-hedged HEDJ in 2013, largely due to EZU’s full exposure to the euro.


Chart courtesy of

That said, the case for a currency-hedged strategy in Europe looks brighter than a year ago. That has to do with a number of factors, including the ECB’s recent surprise cut in interest rates down to 0.25; the euro’s rally so far 2013; and even the speculation of Fed tapering in the coming year.

And as far as currency-hedged exposure to Europe goes, DBEU is probably the most comprehensive pick. HEDJ has greater liquidity, but ironically, even though the fund targets exporters, it misses out on some major British and Swiss exporting powerhouses, since it targets only companies in the eurozone.

At the end of the day, once you narrow down the exposure you want—Europe, the eurozone or both—and choose whether or not you want currency exposure, picking the best Europe ETF from a crowd of products becomes significantly easier.

At the time this article was written, the author held no positions in the securities mentioned. Contact Dennis Hudachek at [email protected], or follow him on Twitter @Dennis_Hudachek.


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