The Case For Investing in Europe (Sponsored)
The biggest challenge with Europe may not be the equity markets as much as the euro. In fact, many of the world’s leading companies are in Europe. In our opinion, these companies remain attractive investment opportunities. And HEDJ, the WisdomTree Europe Hedged Equity Fund, offers investors a way to capitalize on the growth potential of these tremendous exporters while hedging exposure to the euro.
+ Many of the world’s leading companies are headquartered in Europe
+ These global leaders are largely export driven
+ Currency translation can impact these companies, positively or negatively
+ Hedging the euro is one way to lower risk2 to investing in European equities
EUROPEAN EQUITIES AND EURO CURRENCY EXPOSURE
In most cases, when investors think about international equities, they consider the fact that they are gaining exposure to the performance of the underlying firms’ shares. However, that’s not the only investment they are making. Over the past 10 years, we think the difference in volatility has been remarkable, as seen in indexes that are exposed to the performance of the euro versus the U.S. dollar against those that solely generate exposure to the performance of the locally denominated equities.
This illustration measures the beta3 of both European equities in local currency and European equities in U.S. dollars against the S&P 500 Index. Essentially, beta is one measure of one index’s volatility relative to another base index, with a higher number indicating a greater historical sensitivity to the movements of the base index. We chose the S&P 500 Index here because many U.S.-based investors are heavily exposed to U.S. equities, and this index could give some indication of the relative levels of risk that exist between European equities (in both local currency and U.S. dollars) relative to U.S. equities. What we see within the chart is that, relative to U.S. equities, European equities in local currency had very similar (and sometimes lower) volatility as U.S. equities, at least when viewed through the beta statistic.
+ Over the past 10 years, the beta of European equities in U.S. dollars has been approximately 37%
higher than that of European equities in local currency. A similar story persists through the one,
three- and five-year periods.
+ We believe this is an apt illustration of how the euro has added volatility over these periods. Since
it’s very difficult to predict which way the euro may move, we believe that local exposures are
worth consideration solely for their potential to reduce volatility over time.
CURRENCY VOLATILITY CAN BE A SIGNIFICANT RISK
When investing internationally, investors face more than simply the volatility of the securities they choose; they
also face the volatility of the local currency. Sometimes currency movements help investments, and sometimes
they can hurt them.
THE 50/50 PARADIGM
When it comes to a currency such as the euro, there will be cycles of both appreciation and depreciation against the U.S. dollar. Given the difficulty in predicting exactly when these cycles will turn, WisdomTree would ask why typical allocations should always fully assume this currency risk. Depending on one’s investment goals and risk tolerance, an allocation that is 50% hedged and 50% unhedged—especially for someone without a strong view as to a currency’s future performance—may be a better baseline from which to dial up or down, depending on one’s conviction regarding the direction of any future currency trend.