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Buy Europe Without Euro Risk With This New ETF – ETF News And Commentary

Euro zone’s celebration of the end of a prolonged recession last year was really short-lived as the region again got itself entrapped in a slowdown and deflation worries from mid 2014. Most of the foremost nations of the continent are presently dragging their feet in terms of economic growth, with some slipping into another recession.

To fight these issues, the European Central Bank (ECB) is resorting to every possible step including ultra-low policy rates, negative deposit rates and launch of a program to buy back asset-backed securities and covered bonds. If this was not enough, the ECB indicated that it would implement a broad-based QE measure should the region need it (read: Euro Zone Gets QE Hints, 3 ETFs to Buy on Stimulus Hopes).

While these measures should boost the stock market rally, a flush of liquidity is having an adverse impact on the currency, the Euro.  The currency lost about 8% (as of December 12, 2014) against the greenback in the last six months. The plunge was more prevalent given the dollar’s strength during the said phase.

Thanks to the Euro slide and the possibility of a strong dollar following the probable hike in interest rates next year, investors are starting to embrace currency-hedged ETFs in droves. There isn’t anything more unfortunate than seeing one’s otherwise impressive portfolio choices fail because of soft foreign currency (read: Hedged European ETFs in Focus: Best Choice for Europe Now?).

Bearing this sentiment, Deutsche Asset & Wealth Management recently rolled out a hedged version focused on Europe recently, DBEZ. Let’s discuss the fund in greater detail below:

DBEZ in Detail

The fund looks to follow the MSCI EMU IMI U.S. Dollar Hedged Index to provide exposure to more than 600 of the largest European companies. As of November 5, 2014, the index includes 682 securities with an average market cap ranging from about $ 6.09 billion to about $ 23.96 million.


The product is a highly diversified with no stock accounting for more than 2.78% of the portfolio. Among individual holdings, Bayer AG-Reg takes the top spot, followed by Total SA and Sanofi with, respectively, 2.62% and 2.56% exposure.

Sector wise, Financials gets the highest exposure with 22.8% of the portfolio. Consumer Discretionary, Industrials, Materials and Consumer Staples also get double-digit investments, while Health Care gets the least exposure with only 4.8% of the basket.

As far as country exposure is concerned, Germany (29.55%) gets the top priority while France (29.65%), Spain (11.57%) and Italy (7.86%) take up the next three positions. The fund charges 45 bps in fees.


How Does it Fit in a Portfolio?

The fund is a good choice for investors seeking exposure to the Euro zone. At the same time, it is a tool to safeguard investors from negative currency translations. Health of the Euro zone companies also appears stable as evident by impressive corporate earnings in Q3.

As per Reuters, net earnings for 36% of total market capitalization reported so far are up 7.1% on almost flat revenues with beat ratios of 67% and 59%, respectively. If this was not enough, about 80% of ECB banks cleared the latest stress test.

This, coupled with an accommodative central bank, undoubtedly warrants a look at the Euro zone to earn some quick gains. However, this return can be curtailed on repatriation as the U.S. dollar is hovering at multi-year highs on QE taper and rising rate risk for next year. In such a scenario, possessing DBEZ, which is protected from currency translation, in one’s portfolio might be a wise decision (read: 3 European ETFs Worth Considering on ECB Measures).


The European ETF space is pretty competitive, so it could be slightly tough for the new entrant to build up assets. However, we are hopeful as the hedged ETFs space still has room to grow.

The issuer itself has a product in the name of Deutsche X-trackers MSCI Europe Hedged Equity ETF (DBEU) which offers exposure to more than 400 European stocks in developed markets while at the same time providing a hedge against any fall in a number of currencies in the region including the Euro, the British pound, and the Swiss franc to name a few. Making a debut last year, DBEU has become a $ 680 million fund.

However, the topper among the hedged ETFs list is WisdomTree Europe Hedged Equity Index Fund (HEDJ) which has generated about $ 5.2 billion in assets so far.  Moreover, there is a flurry of single-country hedged ETFs in this space including ones targeting Germany, which could offer up some competition.

However, investors should note that Deutsche Bank has proven its skills in offering successful hedged ETFs lately in different markets. So, the profound knowledge of the issuer on this subject might help the new entrant to garner considerable investor assets (read: 3 More Hedged ETFs Hit the Market from Deutsche Bank).

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DEUTS-XT MS EMU (DBEZ): ETF Research Reports
DEUTS-XT MS EUR (DBEU): ETF Research Reports
WISDMTR-I HE FD (HEDJ): ETF Research Reports
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