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HEDJ

European ETF Strategy Unraveling

(Bloomberg) — A European stock trade that deployed the use of ETF products as a means of hedging currency exposure is one that enamored global investors throughout 2015 and drew more money than practically anything else in equities is blowing up in people’s faces.

As the moves in the the WisdomTree Europe Hedged Equity Fund (NYSE:HEDJ) show, the strategy of going long the region’s shares while hedging to mute the euro’s swings is unraveling. The exchange- traded fund has plunged a record 14 percent in December, erasing annual gains that swelled to as much as 23 percent in April and were still above 18 percent in July. Hit by withdrawals, its market value has fallen to $17 billion from more than $22 billion as recently as August.

Investors are pulling money from the fund like never before after Mario Draghi’s increase in European Central Bank stimulus failed to live up to expectations, triggering a decline in the region’s stocks and a strengthening of its currency.

“A lot of investors have been protecting themselves against a weaker euro, aiming for European equity returns which have been very strong this year as long as you hedged the euro,” said Ewout van Schaick, head of multi-asset portfolios at NN Investment Partners in The Hague. His firm oversees 180 billion euros ($198 billion). “That story seems to be over after the recent central bank actions. Investors are positive on European equities but are less sure it has to be on a hedged basis.”

The fund’s popularity grew earlier this year, when its hedge became of paramount importance as the ECB started its bond-buying program, triggering a weakening of the euro to levels not seen since 2003 and a 22 percent surge in the region’s stocks. In the first four months of the year, traders poured $13 billion in the ETF, making it the favorite vehicle to bet on European equities.

NYSE FEZ
Euro Stoxx 50 Index NYSE:FEZ

FEZ Fizzles. Fast forward to December, and things don’t look as good. The Euro Stoxx 50 Index, whose ETF tracker is NYSE:FEZ is down 7.1 percent through yesterday’s close, heading for its worst ending to a year since 2002, while the euro is set for its biggest monthly advance since April against the dollar.

Forecasters don’t see the currency moving much from now. It’ll weaken to $1.05 and stay at that level for the first three quarters of next year, before starting to rebound, according to projections. It’s hovered around $1.09 for most of December.

That doesn’t mean the consensus is turning bearish on European equities. Even without a significant weakening of the currency, strategists expect euro-area equities to climb another 12 percent by the end of next year, aided by a recovering economy, ECB stimulus and low valuations. The Euro Stoxx 50 rose 1.2 percent at 11:47 a.m. in London. At 14.2 times estimated earnings, companies on the gauge are cheaper than those on the Standard & Poor’s 500 Index or MSCI All-Country World Index.

“We still believe in European equities,” Van Schaick said. “The European economic recovery is in the earlier stage, so all the lights are green for Europe. They’re going to do a lot better than U.S. equities next year.”

And, The Winner Is…According to ETF.com…

MarketsMuse.com ETF coverage profiles ETF.com Awards Ceremony courtesy of opening extract from ETF.com news release. Category winners for “best” and respective ‘runners up’ extend across best issuers, best strategists, best capital markets desk, and best products across equity, fixed income, and currency and include the following products: HEDJ, DXJ, CHNB, ZROZ, BNDX, VTI, EMQQ, FV, IUSB, PDBC, TYTE, WYDE, BCHP, COMT, DIVY, SXOE, DGRO, DVP, FMLP, AIRR, QVAL, ASHS.

The WisdomTree Europe Hedged Equity Fund (HEDJ) was named the ETF of the Year at the second annual ETF.com Awards held tonight in New York—in no small part because it has been more popular than competing equity strategies designed to protect U.S. investors from the strength of the dollar.

ETF.com, the 15-year-old news, views and financial data company focused exclusively on exchange-traded funds, also honored important individuals like Lee Kranefuss, who built iShares, the world’s largest ETF company; and the fund sponsor First Trust.

The annual awards ceremony, which took place at Chelsea Piers, recognizes the people, products and companies that have been instrumental in moving the 22-year-old ETF industry forward and that have helped create better options and outcomes for investors.

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Currency-Hedged ETFs In Demand by Global Macro-Focused Traders

MarketsMuse update courtesy of reporting by Reuters’ Gertrude Chavez-Dreyfuss and Ashley Lau

NEW YORK (Reuters) – U.S. investors spooked by wild swings in the foreign exchange market are piling into exchange-traded funds that strip out the local currency on their international equity portfolios, making them one of the most sought-after financial products in 2015.

With the dollar having rallied more than 19 percent since the beginning of 2014, investors are seeing gains in overseas stock markets eaten up by losses against the greenback.

“People are voting with their feet,” said Luciano Siracusano, chief investment strategist for WisdomTree Investments in New York. “They’re putting billions of dollars into these funds, and what they’re saying is, ‘We don’t want to be 100 percent unhedged.’”

Some say there aren’t enough of these products for investors looking for international exposure. These ETFs have about $31.5 billion in assets, up nearly five-fold from 2011. But assets in international equity ETFs exceed $275 billion, according to WisdomTree.

“There are 40 countries with stock markets deep enough to have a currency-hedged product,” said David Kotok, chairman and chief investment officer of Cumberland Advisors in Sarasota, Florida, which oversees $2 billion, and whose firm’s equity investments are solely through ETFs. Continue reading