Best ETFs to Profit from a Weak Euro

Now is a good time to consider ETFs that can profit from a low euro. The European currency is weak, and it appears that it will remain that way for the foreseeable future as European countries work through the aftereffects of the recent global financial crisis that evolved into a debt crisis in Europe.
european-debt-crisisAccording to a February paper from the IMF, “Investment across the euro area remains below its pre-crisis level. Its performance has been weaker than in most previous recessions and financial crises.”
The weakness in investment is particularly evident in Portugal, Italy, Greece and Spain, where the sovereign debt crisis is still a concern. High leverage in these nations, in addition to corporations with high debt-to-equity levels across the eurozone, means that the eurozone may still be in the early stages of the de-leveraging process.
Add in high levels of uncertainty and you have compelling reasons for the European Central Bank to continue its quantitative easing policy for quite some time. Therefore, it is possible that investors can capitalize on this weakness if they use an investment vehicle designed for a weak euro.

2 ETFs to Profit from a Weak Euro

If you are looking for securities that can add diversity and potential strength to your portfolio, now is a good time to consider these two ETFs that can profit from the weak euro:

  • SPDR Euro Stoxx 50 (FEZ): This ETF offers exposure to the 50 largest stocks within the eurozone. This means that the fund excludes holdings based in the United Kingdom and Switzerland, but you’ll get a heavy dose of stocks of companies in France, Germany and Spain, with lesser exposure to other European countries. The year-to-date price gain for FEZ is 7%, which is impressive compared to the S&P 500, which is up only 0.5% in 2015. If you’re looking for an addition to a portfolio designed for income, and you can stomach some short-term volatility, you’ll like the 3.53% yield. The expense ratio for FEZ is a cheap 0.29%.
  • WisdomTree Europe Hedged Equity (HEDJ): This ETF allows investors to participate in strong European brands while simultaneously capitalizing on the relative strength of the U.S. dollar. The fund seeks to track the performance of the WisdomTree Europe Hedged Equity Index, which includes stocks of European companies with significant revenue from exports. This provides the potential to have higher returns than non-currency hedged European stock funds when the value of the U.S. dollar is increasing relative to the value of the euro. But you can expect lower returns with HEDJ when the U.S. dollar declines against the euro. Year-to-date, HEDJ has an impressive price gain of 18.1%. Expenses are reasonable at 0.58%.

For a final word of caution, these ETFs can outperform when the euro is weak, but currency fluctuations and economic conditions are difficult to predict and conditions can change quickly.
ETFs with concentrated holdings or hedge strategies like these can be appropriate for investors comfortable with high relative market risk and volatility. These funds can be used as part of a tactical investment strategy in a diversified portfolio.
As of this writing, Kent Thune did not hold a position in any of the aforementioned securities.

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