iShares' New Euro Hedged ETF Needed

July 14, 2014

But this new product is different than other euro-hedged funds.

Last Thursday, BlackRock launched its iShares Currency Hedged MSCI EMU ETF (HEZU) to compete in the hedged European equity space that's been gaining traction.

In 2014 alone, the WisdomTree Europe Hedged Equity ETF (HEDJ | B-45), the veteran in the space, has pulled in more than $1.2 billion, catapulting its total assets under management to $1.9 billion.

HEZU's other competitor, the db X-trackers MSCI Europe Hedged Equity (DBEU | B-52), has pulled in $186 million this year, which, considering DBEU's $7.9 million in assets at the start of the year, that's fund growth of 2,350 percent in just seven months!

European equities, especially from the eurozone, have been on a tear since European Central Bank President Mario Draghi's "whatever it takes speech" back in July 2012. Speculation is now mounting about whether the ECB will eventually engage in outright quantitative easing.

The eurozone is battling deflationary pressures, and it's no secret the ECB would like to see the euro weaken from its current highs. The idea is that any further stimulus measures would keep the equity rally intact while keeping a lid on further euro appreciation.

So what makes HEZU one of a kind and different from its competitors? Several factors, besides its unique fund structure.

HEZU literally holds iShares' blockbuster exchange-traded fund, the $11 billion iShares MSCI EMU ETF (EZU | A-62), with a forward-currency-contract overlay to neutralize any euro exposure.

Structurally, it's identical to iShares' suite of other currency-hedged ETFs, which I've written about extensively. In a nutshell, by holding a highly liquid ETF as its core constituent for creation/redemption purposes, it boosts the fund's block liquidity and keeps trading costs low.

From an exposure perspective, HEZU provides vanilla, cap-weighted exposure to large- and midcap securities from eurozone nations by holding EZU.

WisdomTree's HEDJ, which I consider to be HEZU's main competitor, is anything but plain vanilla.

While the dividend-weighted HEDJ also offers eurozone equity exposure, it screens out companies that don't get more than 50 percent of their revenues from outside of Europe. This naturally tilts HEDJ heavily toward exporters.

DBEU is a cap-weighted fund that holds large- and midcap stocks from all of Europe, as opposed to the eurozone. Non-euro countries like the U.K., Switzerland and Sweden make up close to 50 percent of the fund's weighting. Keep in mind their respective currencies are also hedged, along with the euro.

HEDJ's multilayered methodology and DBEU's comprehensive coverage of Europe create very different portfolios from HEZU from a country sector perspective, which is likely to produce disparities in their returns.

Country Breakdown (%)
  HEZU HEDJ DBEU
UK 0 0 33
France 31 25 14
Germany 30 25 14
Switzerland 0 0 13
Spain 12 20 6
Netherlands 10 15 5
Sweden 0 0 5
Italy 8 2 4
Denmark 0 0 2
Belgium 4 8 2
Finland 3 3 1

 

 

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