While the worlds investing community continues to concentrate on what is happening in Europe, due to the recent quantitative easing recently announced by the European Central Bank, you may be wondering how you can play the situation.
What is Going on in Europe?
But before we get to how you may be able to profit, let's look at what is happening. Last week the European Central Bank announced they would buy 60 billion Euro worth of bonds each month until the end of September 2016. This will essentially put 1.1 trillion euro into the European economy in an effort to help it get moving again. The quantitative easing process injects cash into an economy (increasing the money supply) which keeps interest rates low, making it easier for consumers and businesses to borrow, in the hope they will do so and boost economic growth.
The US Federal Reserve announced and has carried out a similar plan over the past few years and by most measures it has worked, but it takes time and carries both positive and some negative consequences. One positive is that since interest rates are low, the amount of money being put into bonds slowed due to the very low returns, which caused more cash to be put to work in equities. That influx of cash in stocks has helped fuel the recent bull rally in the US stock market. One of the downsides was there was an increase to the supply of US dollars, hurt the exchange rate against other currencies around the world.
The European QE will likely have the same effect on European equities and their currency, the Euro. So how do you play it?
What to Buy?
The Wisdom Tree Europe Hedged Equity ETF (HEDJ) is one of your best bets. First this ETF tracks European equities, particularly shares of European exporters. So if you believe European investors will move cash from bonds to equities in order to find yield when bond yields fall in the coming months, then you will be good to go. Also it is a benefit that the fund focuses on those companies who get at least 50% of their sales from exports out of the Eurozone, since other parts of the world are in general more economically sound than Europe at the moment.
Furthermore, and perhaps the most important aspect of this ETF is that it neutralizes the investor's exposure to currency fluctuations between the U.S. dollar and the euro. Over the past year the dollar has gained 21% as the euro has fallen to $1.12 and investors who have owned HEDJ haven't felt that pain.
Lastly, if the idea of investing in Europe when it seems to be slipping back into a recession scares you, maybe this will help; according to a recent survey of 1,465 people with investable assets between $1 and $5 million, Europe was second, only to the U.S., when asked were those individuals would be putting money in 2015.
But, what I find even more convincing than that is from January 21 to the 27, the fund has seen net inflows of more than $1.5 billion. It is likely investors believe the ETF has more room to run, even though year-to-date HEDJ is up 7.64% while the S&P 500 is down 2.76%.
Final Thoughts
As with any investment, investors should consider their own situation before investing, but if you have been looking for more exposure to European equities, the Wisdom Tree Hedged Equities ETF may be a great place to start.
Matt Thalman
INO.com Contributor - ETFs
Disclosure: This contributor has no positions in any stocks mentioned in this article at the time it was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
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