For years the eurozone was on the brink of recession, as some countries were actually experiencing negative growth and continuous high unemployment. There was real fear that disinflation — slowing short-term inflation without a decline in prices — would soon become deflation.
Another reoccurring issue was Greece. The election of the far-left leaning Syriza party once again fueled fears that the contagion of defection was on the horizon. The markets have heard this same melodrama for years as European Central Bank President Mario Draghi promised to do whatever it takes to preserve the euro.
Now it seems he’s finally staying true to his word. Last week he announced that the ECB would buy $70 billion in government bonds from March 2015 until September 2016 — or maybe even longer.
Why not? Europe saw the U.S. follow this course in 2010 and it caused equities to skyrocket to new highs. Devaluing the euro would also would strengthen the eurozone export economy by making European-manufactured products cheaper and more competitive abroad.
Here are three ETFs plays that should benefit greatly from the eurozone’s new monetary policy.
ETFs for a Smaller Euro: WisdomTree Europe Hedge Equity Fund (HEDJ)
The WisdomTree Europe Hedged Equity Fund (NYSEARCA:HEDJ) focuses on European companies that rely heavily on export revenue. This is a good thing when you just devalued your currency.
Its top 10 weighted stocks are Anheuser-Busch InBev SA (ADR) (NYSE:BUD), Telefonica S.A. (ADR) (NYSE:TEF), Unilever plc (ADR) (NYSE:UL), Mercedes-Benz-maker Daimler AG, pharmaceutical firm Sanofi SA (ADR) (NYSE:SNY), Banco Santander, S.A. (ADR) (NYSE:SAN), Siemens AG, Spanish bank Banco Bilbao Vizcaya Argentaria SA (ADR) (NYSE:BBVA), Bayer AG and L’Oreal SA.
In these times where U.S. investors are wary of a strong dollar versus other weaker currencies, HEDJ hedges against the fluctuations of the euro by entering into one-month forward currency contracts and then rebalancing at the end of the month so the investors can profit from the gains in that local market.
Since it was launched at the very end of 2009, HEDJ has returned more than 41% and even paid $2.10 in dividends in the last year, for a dividend yield of 3.4%. The expense ratio is 0.58%.
With its concentration in large cap companies with strong balance sheets, expect HEDJ’s returns not to disappoint for 2015.
ETFs for a Smaller Euro: Vanguard FTSE Europe ETF (VGK)
The Vanguard FTSE Europe ETF (NYSEARCA:VGK), tracks an index made up of 500 common stocks in 16 European countries. Take note that all of these countries are not in the eurozone — meaning that they do not all use the euro currency.
Nearly half of the stocks are comprised of British and Swiss companies. The top holdings are Nestle SA, Novartis AG (ADR) (NYSE:NVS), Roche Holding Ltd., HSBC Holdings plc (ADR) (NYSE:HSBC) and Royal Dutch Shell plc (ADR) (NYSE:RDS.A).VGK takes a very broad look at the European continent. Neither Britain or Switzerland use the euro.
Why use an ETF that’s heavily weighted in the United Kingdom and Switzerland? The eurozone is Britain’s major export market. If the EU recovers, the U.K. will be a major benefactor even when considering the weaker euro. The same holds true for the Swiss, which sells 60% of its exports in the EU.
This is a long play banking on an eurozone recovery that will “float all the boats” — especially these two major trade partners. The Vanguard fees are a bargain at 0.12% when the typical fee is in the neighborhood of 1.5%. The dividend yield of 4.4% over the last 12 months is also attractive.
ETFs for a Smaller Euro: iShares MSCI EMU Index ETF (EZU)
If you are only looking at ETF plays that strictly invest in eurozone countries, then you should take a look at the iShares MSCI EMU Index (NYSEARCA:EZU).
The MSCI EMU Index consists of stocks from the 10 developed market countries: Austria, Belgium, Finland, France, Germany, Ireland, Italy, the Netherlands, Portugal and Spain.
EZU is heavily weighted to the region’s financial sector, so expect the ECB’s quantitative easing to be a big boost for banks due to how the region works.
Financial markets in the EU do not work the same way they do in the U.S. In the EU, corporations are mostly funded by bank loans, whereas in the U.S. there’s a vast market for corporate debt. The ECB’s bond-buying program will flood banks with cheap money, hopefully encouraging corporations to take loans and spur growth.
The added activity from quantitative easing will be good for the banking sector in eurozone and give EZU nice returns going forward.
EZU fees are 0.48% and it paid a 2.8% dividend over the last 12 months.
As of this writing, Jason Jenkins did not hold a position in any of the aforementioned securities.
