ETF Exchange Traded Funds
October 10, 2014 - A Unique Way to Invest in the Eurozone by Morningstar Investment Research
This ETF offers currency-hedged exposure to dividend stocks in the eurozone.
Despite the risks they face, eurozone stocks may offer good diversification benefits to U.S. investors. However, currency risk is a very real threat. Low to negative interest rates across the eurozone, coupled with lackluster growth, could cause the euro to weaken relative to the U.S. dollar. WisdomTree Europe Hedged Equity ETF (HEDJ) offers investors a way to gain exposure to European stocks, while hedging this currency risk.
But even after taking most of the currency risk out of the equation, European stocks still face considerable risks amid a backdrop of weak demand and economic uncertainty across the eurozone. This may explain why most broad European stock indexes are trading at a discount to their U.S. counterparts. However, this macroeconomic risk may present investors with an opportunity to buy quality multinational names that happen to be based in the eurozone at reasonable valuations. This fund attempts to offer exposure to these types of stocks. It screens for dividend-paying stocks trading in the eurozone that generate more than half of their revenues outside of Europe. It then weights its holdings by cash dividends paid. This may be a suitable core position for U.S. investors looking to profit from a potential rebound in the eurozone, while limiting currency and region-specific risk.
The fundís dividend screening and weighting approach helps to keep volatility low. Because the fund screens for stocks that pay cash dividends, more mature and stable companies anchor the portfolio. This, along with the fundís currency-hedging program and focus on global companies, can significantly reduce volatility. For instance, the fundís standard deviation of returns (9.9%) since August 2012, when it adopted its current index, was considerably less than the non-currency-hedged, market-cap-weighted MSCI EMU Indexís (14.5%).
The eurozone continues to suffer from structural problems. On Oct. 7, the International Monetary Fund cut its 2015 global growth because of troubles in Europe. Inflation, currently an anemic 0.3%, continues to trend lower month-over-month. The amount available for bank lending has fallen significantly and stunted growth, and poor manufacturing and service demand has kept unemployment in excess of 11%.
However, this fundís focus on multinational companies helps limit its exposure to the European economy. Its focus on dividend-payers also helps reduce volatility, giving investors exposure to a portfolio of companies with relatively stable businesses and good profitability. For instance, over the trailing 12 months through September, the fundís holdings generated a higher return on invested capital (10.2%) than the broad market-cap-weighted eurozone MSCI EMU Index (9.2%). Dividends constrain managersí ability to invest in low-return projects or make acquisitions and tend to be associated with shareholder-friendly management teams. Many of the fundís holdings are well-regarded household names, such as Anheuser-Busch Inbev SA (BUD) and LíOreal SA (LOR).
However, this quality orientation comes at a price. At the end of September, the fundís price-to-forward earnings multiple (17.0) was slightly higher than MSCI EMU Indexís (16.2).
The fund is not without its risks, however. Because the fund does not employ a dividend-quality screen, there is a risk that the fundís holdings can cut their dividend during periods of economic turmoil. This could hurt the fundís performance because of the negative message that dividend cuts signal.
The fund tracks the WisdomTree Europe Hedged Equity Index, which offers concentrated exposure to more than 100 dividend-paying large- and mid-cap stocks in developed Europe. The index weights its holdings by annual cash dividends paid. Individual security weights are capped at 5%, while sector and country weights are capped at 25%. To qualify for inclusion in the index, each stock must be domiciled in the eurozone, trade in euros, have a market cap in excess of $1 billion, and derive at least 50% of its revenue outside Europe. The fund uses forward currency contracts and futures to hedge euro exposure.
Relative to the MSCI EMU Index, the fund offers greater exposure to consumer defensive, consumer cyclical, and industrials and less exposure to financial services, utilities, and energy sectors. The index is rebalanced annually in June. France (24.8%), Germany (24.7%), and Spain (19.9%) are the fund's largest country weightings.
The fund changed its strategy and benchmark at the end of August 2012. The previous strategy focused on a currency-hedged portfolio of broad-based, dividend-paying, developed international stocks. After the switch, the index changed its focus from developed international stocks to countries in the eurozone that derive most of their revenue outside of the eurozone.
The fundís 0.58% expense ratio is not the lowest in the Europe stock exchange-traded fund category or even the lowest currency-hedged European ETF. Over the trailing three years through August, the fund has lagged its benchmark by 0.48%, slightly less than the amount of its expense ratio.
Deutsche X-trackers MSCI Europe Hedged Equity (DBEU) (0.45% expense ratio) offers currency-hedged exposure to Europe. Unlike HEDJ, DBEU weights its holdings by market cap and uses the broader MSCI Europe Index that includes non-eurozone countries such as the United Kingdom and Switzerland.
Investors looking for a less expensive European ETF may consider Vanguard FTSE Europe ETF (VGK) (0.12% expense ratio). Unlike HEDJ, VGK does not hedge its currency risk. This fund weights by market cap and includes stocks in Switzerland and the United Kingdom.
Click Here for a Free Trial of Morningstar Investment Research
Click the Links Below to Review ETF Exchange Traded Fund Trade Alert Software and Advisory Services
Free Trial Zacks ETF Rank
Our Zacks ETF Ranking system was designed specifically for Exchange-Traded Funds in order to help you pick the best product for your investing needs. Not only does this system take into account asset class forecasts, but it looks at several ETF specific factors, such as expense ratios and bid-ask spreads, to give investors a comprehensive account of a funds investment profile. This Ranking method is built for a one year outlook and seeks to find ETFs that are likely to outperform. The funds are ranked on the traditional Zacks Rank scale of #1 (Strong Buy) to #5 (Strong Sell), and we currently evaluate a variety of funds across asset classes including equities, commodities, fixed income and currency.
ETF, Exchange Traded Funds Research, ETF Investing
ETF Screener with Lowest Price-to-Fair Value, Most Heavily Traded, and YTD Top Performers. ETF Tools with ETF Performance Table, ETF Analyst Picks, ETF Valuation Quickrank, Cost Analyzer ETF, and ETF Analyst Reports. ETF Discussion Boards and Free ETF Newsletter.
Portfolio Prophet Exchange Traded Funds Trade Alert Software
The Portfolio Prophet is our premium trade alert software for quickly & easily adding Exchange Traded Funds (ETFs) to your trading portfolio. The Portfolio Prophet alerts you whenever a new trade is setting up; then, it follows the trade to completion, so you'll know exactly when to change your stop orders which "lock in" profit. You can even customize it based on your risk tolerance - aggressive, moderate, or conservative.
Feel the Power of TD Ameritrade and Trade Free for 60 Days
Committed to providing one of the highest levels of service since 1975. For over 35 years weíve prided ourselves on providing our clients with industry leading customer service and resources.
Three Reasons to Choose TD Ameritrade for ETF Trading
1. Over 100+ Commission-free ETFs - We offer a curated selection of commission-free ETFs selected by Morningstar Associates.
2. ETF Knowledge Center - Leverage the ETF Knowledge Center and arm yourself with greater information and education on ETFs. Explore video tutorials, articles, and announcements on a range of topics, from ETF basics to in-depth subjects like accessing commodities, risks associated with leveraging, and measuring ETF liquidity.
3. Powerful Trading Platforms - Trade Architectģ and thinkorswimģ help you to seize opportunities with real-time ETF quotes, market insight and streaming news to give you new trading ideas.
What Is An Exchange Traded Fund?
An exchange-traded fund or ETF is an investment vehicle traded on stock exchanges, much like stocks or bonds. An ETF holds assets such as stocks, bonds, or futures. Institutional investors can redeem large blocks of shares of the ETF (known as "creation units") for a "basket" of the underlying assets or, alternately, exchange the underlying assets for creation units. This creation and redemption of shares enables institutions to engage in arbitrage and causes the value of the ETF to approximate the net asset value of the underlying assets. Most ETFs track an index, such as the Dow Jones Industrial Average or the S&P 500.
An ETF is Like a Mutual Fund and a Closed End Fund
An ETF combines the valuation feature of a mutual fund or unit investment trust, which can be purchased or redeemed at the end of each trading day for its net asset value, with the tradability feature of a closed-end fund, which trades throughout the trading day at prices that may be substantially more or less than its net asset value. Closed-end funds are not considered to be exchange-traded funds, even though they are funds and are traded on an exchange. ETFs have been available in the US since 1993 and in Europe since 1999. ETFs traditionally have been index funds, but in 2008 the U.S. Securities and Exchange Commission began to authorize the creation of actively-managed ETFs.
Stock Option Forex Futures Training Seminars Webinars Workshops
Click Here For The Complete 2014 Schedule
Professional investors traders teaching successful low-risk high-reward
trade strategies. Power profit secrets for stocks, options, forex, futures
investing trading success. Or avail of Home Study Courses and or
Trading Softwares available to improve your investment returns.