German Equities: With Or Without The Euro?

August 18, 2014

A sagging euro drags down nonhedged equity exposure.

German_ETFs_hedged_vs_unhedged

Chart courtesy of StockCharts.com

A contraction in Germany's GDP of 0.2 percent in the second quarter pushed prices of German bunds to an all-time high last Thursday, as investors traded risk for safety. For the first time in history, the yield on the country's 10-year debt dipped below 1 percent—a level not seen even during the darkest days of the euro debt crisis.

While noteworthy, the German GDP news is no real surprise though. Tensions with Russia over Ukraine and weak global demand were bound to be a serious head wind to Europe's biggest economy. Indeed, the German stock market has been reflecting this for a while now.

While all German equity ETFs have turned in losses for the last few months, the choice of investment vehicle to play the market there has made a difference. A plain-vanilla ETF like the iShares MSCI Germany ETF (EWG | A-97), for example, has lost about 7 percent in the last three months, whereas the WisdomTree Germany Hedged Equity ETF (DXGE | C-63) has only lost half that.

The main driver of this difference is in the currency hedge: The euro has depreciated about 2.5 percent against the dollar since May, putting an extra dent in EWG's returns. However, another important factor contributing to DXGE's outperformance is the fund's focus on export companies. The weaker euro has been good for them.

With more easing expected from the ECB to help prop up the continent's struggling economies, the European currency may keep sliding. Should this trend continue, ETFs like DXGE would be a far better place to be going forward than their unhedged broad-index counterparts.

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