The WisdomTree Europe Hedged Equity ETF (HEDJ) is one of the best ETFs for exposure to European equities. This article looks into the reasons for considering HEDJ as a good investment option.
According to the WisdomTree ETF website:
The Fund will seek to track the performance of the WisdomTree Europe Hedged Equity Index. The Index and Fund are designed to have higher returns than an equivalent non-currency hedged investment when the value of the U.S. dollar is increasing relative to the value of the euro, and lower returns when the U.S. dollar declines against the euro. The Fund will invest in stocks of European companies with significant revenue from exports.
There are two important factors here to strengthen my case for investing in the ETF. First, the hedged ETF is designed to give superior returns when the value of the U.S. dollar is increasing relative to the euro. I am of the opinion that the euro will continue to trend lower for long term against the dollar. After bottoming out in October 2000 at 0.83 per dollar, the euro trended higher for the next eight years, peaking in 2008 at almost 1.6 per dollar. Since then, the euro has again been trending down and will continue to trend down. I am not suggesting that the U.S. does not have problems and the dollar will not weaken. But on a relative basis, the concerns in the eurozone are much higher and the dollar will perform relatively well.
The problems for PIIGS countries have not been solved, just delayed. With unemployment levels of 25% in Spain and record high unemployment in Greece (23%), the core problem in the eurozone has not been solved. In such an economic scenario, government debt will continue to balloon. Furthermore, the banking system in the eurozone is in more precarious shape than the U.S. banks. It would not be surprising to see more bank bailouts in the foreseeable future. All of these concerns will lead to the euro trending lower over the long term compared to the dollar. Therefore, investors considering exposure to the ETF will benefit from a weakening euro.
The second important and positive thing related to this ETF is its focus on companies deriving significant revenue from exports. The ETF has 25.59% exposure to German companies, 24.07% exposure to French companies, and 18.45% exposure to companies in the Netherlands. I expect the eurozone crisis to be prolonged and GDP growth in the eurozone to remain sluggish for the next three to five years. In such a scenario, companies operating within the eurozone might witness sluggish revenue growth or even a decline in revenue. However, export-oriented companies might do relatively better in an environment where the euro is weakening.
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Besides these positive factors, another rationale for investing in the ETF would be its sector exposure. The exposure to the financial sector is just 8.19% with high exposure to relatively strong sectors, which are less prone to be impacted by economic shocks. Nearly 54% of the ETF's exposure is in the consumer staples, consumer discretionary, and healthcare sectors. Therefore, even if the global economy is relatively weak, these companies should continue to do well.
Overall, the ETF is a good portfolio diversification option. The ETF also has a low expense ratio of 0.58% and a 30-day SEC yield of 2.92%.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.