ETFs to avoid getting spanked by the European stock rally

Investors have been clammoring for European equities ever since the European Central Bank announced plans to buy $ 1 trillion in government bonds early this year. Germany’s DAX (^GDAXI) is hovering at a record, while the Stoxx Europe 600 (STXX) is near an 8-year high.

However riding these stock markets higher won’t guarantee top returns. “If you are not hedged the right way, currency-wise you can get spanked,” warns Tom Lydon, editor of ETFTrends.com. “Valuations can be a lot lower.”

This so-called QE-Knockoff program has boosted the inflows of several exchange traded funds that help investors navigate currency risks including 3 of the biggest; the WisdomTree Europe Hedge Equity Fund (HEDJ), Deutsche X-Trackers MSCI Europe Hedged Equity ETF (DBEU) and the Deutsche X-Trackers MSCI EAFE Hedged Equity ETF (DBEF). “They are seeing billions of dollars of flows that are going into that area, because smart investors, smart advisors are trying to be at least currency neutral.” 

Through Tuesday, investors have added nearly $ 3B to the Deutsche X-Trackers MSCI EAFE Hedged Equity ETF bringing total assets under management to $ 4.9B. While the Deutsche X-Trackers MSCI Europe Hedged Equity ETF has added $ 659 million lifting assets to $ 1.5B, according to the company.

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These ETFs buy futures, which hedge against currency swings, explains Lydon. “We’re able to wipe out the currency fluctuation and you are buying just the equity.” That has been an important strategy especially with the advance in the U.S. dollar. The PowerShares DB US Dollar Bullish ETF (UUP) has advanced 17% in the past 12 months relfecting the dollar’s strong performance against other major currencies including the Euro. The CurrencyShares Euro ETF (FXE) has declined by nearly the same amount.

Investors will likely get more details on the ECB’s bond buying program, which is set to begin this month, when the central bank meets on Thursday.

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