The euro has fallen mightily against the U.S. dollar, and some believe it will weaken even more. Regardless of whether the euro further weakens or makes a strong rally, it is prudent to know how much your ETF portfolio is exposed to the euro.
Don Dion for TheStreet remarks that foreign ETFs have two components to their returns: returns in local currency of the asset the fund holds and currency return – the return based on the differences in foreign exchange rates. There are a bunch of Europe-based ETFs that offer direct exposure to the region, such as:
There is also the WisdomTree International Hedged Equity (HEDJ), which offers international exposure as the MSCI EAFE, but with the currency exposure hedged. The United Kingdom, Sweden and Switzerland are three countries that still maintain their own currencies.
- iShares MSCI Sweden (EWD)
- iShares MSCI Switzerland (EWL)
- iShares MSCI United Kingdom (EWU)
- Global X FTSE Nordic 30 (GXF)
As long as it remains a currency and debt crisis, Europe-related ETFs may suffer smaller declines because they avoid direct euro exposure, but investments may all turn if the situation becomes a full-blown economic crisis.
The next greatest exposure to the euro comes from all-world, ex-U.S. indexes, which are usually heavily invested in Japan and the United Kingdom, followed by eurozone countries, in addition to Sweden and Switzerland.
- Vanguard FTSE All-World ex-US ETF (VEU) has 25% eurozone exposure and 45% total European exposure.
- iShares MSCI EAFE Index (EFA) has similar exposure to VEU.
- Vanguard Europe Pacific (VEA) has 65% Europe exposure – more than a third in the eurozone.
Next come the global ETFs in real estate and fixed-income. SPDRs offer the most assets in these categories.
- SPDR Dow Jones International Real Estate ETF (RWX). Japan, Australia and Hong Kong have the highest weighting, with only around 15% of the fund in the eurozone.
- SPDR Barclays Capital International Treasury Bond ETF (BWX). Japan is 24%, Italy is 11% and Germany is 10%. In total, 46% of assets are in eurozone debt.
- SPDR DB International Government Inflation-Protected Bond ETF (WIP). The fund has 30% of assets in the eurozone, 17% of the holdings are in France.
International sector ETFs are also exposed to European debt. For instance, the contagion in Europe could weaken the economy, weaken the currency and lead to reductions in sector subsidies.
- Claymore/MAC Global Solar Energy (TAN) has 26% of holdings in Germany and 6% in Norway.
- First Trust ISE Global Wind Energy Index Fund (FAN) has 22% in Spain, 16% in Germany, 6% in Belgium and 3% in France.
The crisis in Europe isn’t just confined to European shores, either. Indirect impacts may be as far-reaching as China selling off businesses that deal with the eurozone, increased U.S. capital flows, increased holdings of gold and other precious metals.
The ETFs listed are only a sampling of what is available. Investors should take the time to review ETF holdings and exposures when it comes to troubled regions that many may be looking to avoid.
Max Chen contributed to this article.