ETFs Designed For ECB’s Bond Buying Binge

January 06, 2015


Unhedged European Majors

For those who aren’t interested hedging currencies, or think the euro’s fall has run its course, you can’t go wrong with the majors in the space.


The $11 billion Vanguard FTSE Europe ETF (VGK | A-98) and iShares’ EZU provide solid cap-weighted coverage of their respective markets, both track their indexes remarkably and have ultra-deep liquidity. The main difference between them is, of course, that VGK targets Europe while EZU targets only eurozone nations.


For large-cap-focused investors, the SPDR EURO STOXX 50 ETF (FEZ | A-64) tracks the most famous euro-focused index in the world, the Euro Stoxx 50 Index. This large-cap ETF has more than a decade of trading history and has close to $4 billion in assets.


A Small-Cap Blockbuster

I’d be remiss if I didn’t mention the top-performing Europe ETF since Draghi’s “whatever it takes” speech in July 2012: the $700 million WisdomTree Europe SmallCap Dividend Fund (DFE | C-71).


DFE holds more than 1,000 small-caps from all of Europe, and carries a tiny $1.6 billion weighted average market cap. Despite its small-cap focus, DFE trades at trailing earnings of only 16.13, giving it a deep value tilt, compared with the neutral MSCI Europe Small Cap Index, which trades at trailing earnings of 26.81.


There is currently no hedged Europe small-cap ETF, though I wouldn’t be surprised to see one launch in the coming years.



Here are the returns and volatility of the funds since Draghi’s “whatever it takes” speech in 2012. I used a start date of Aug. 1, 2012, because that speech marked a turning point for European equities, and was a game changer for the eurozone.


(Note: HEDJ changed its index to its current eurozone-hedged strategy on Aug. 30, 2012, meaning there’s a month of data overlap from HEDJ’s prior strategy).




Ticker Daily Std Dev, Annualized P/E (TTM)
FEZ 18.8% 19.68
EZU 17.3% 23.51
HEDJ 14.1% 17.32
VGK 13.7% 19.18
DFE 13.6% 16.13


Data from 8/1/2012-12/30/2014


Eurozone 2015

I’m not going to try to predict in what phase of Draghi’s “whatever it takes”-induced European equity recovery the market now is. That said, I think most would agree that ballgame is probably not over yet.


Clearly, Europe faces head winds. We have uncertainty once again in Greece, with elections set for Jan. 25.


Any quantitative easing program in the eurozone could also look different from what we saw from the Federal Reserve and the Bank of Japan.


Looking Ahead

Furthermore, there’s no guarantee that eurozone stocks would even rally on such an announcement either, especially if the program falls short of what European share prices already reflect.


But for investors who think Draghi will deliver, and want to position themselves for more stimulus from the ECB, there are now a multitude of ETF choices at their disposal.


The main choices mostly come down to whether or not to be hedged, and whether to go Europe or eurozone. Since July 2012, it seems unhedged/eurozone plays have been the winner.


But it remains to be seen if this trend will continue in a post-eurozone QE world.

At the time this article was written, the author held a long position in HEZU. Contact Dennis Hudachek at [email protected], or follow him on Twitter @Dennis_Hudachek.




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