Among the various global central banks, the Federal Reserve looms largest — a status affirmed by its September interest rate cut and expectations of more to come. However, the Fed isn’t the only player in town when it comes to rate cuts and their subsequent impact on equities. The European Central Bank (ECB) is proving two can play the rate-cut game.
Its monetary easing efforts could spotlight exchange traded funds such as the WisdomTree Europe Hedged Equity Fund (HEDJ ). Last Thursday, the ECB pared its benchmark lending rate to 3.25%. That didn’t do much to move HEDJ. However, there are reasons to believe the euro could be in more downside, potentially bolstering the case for the WisdomTree ETF.
Following the ECB’s first back-to-back rate cuts in 13 years, traders are pricing in three more rate cuts by the central bank by the end of the first quarter of 2025. Those moves could stimulate the Eurozone economies represented in HEDJ while depressing the euro. That would benefit the ETF’s currency hedging mechanism.
Time to Hone in on HEDJ
HEDJ has been a decent performer year-to-date, though recent returns have been more muted. That could signal that some market participants don’t fully appreciate the ECB’s potential for aggressive rate cuts.
“Lower interest rates make a currency less appealing to investors as they reduce returns on assets denominated in that currency,” noted deVere Group CEO Nigel Green. “As the ECB continues to signal further rate cuts, this trend is expected to intensify. The euro is likely to weaken as investors seek higher returns elsewhere, potentially leading to capital outflows from the Eurozone.”
Investors considering HEDJ, take note: ECB’s recent easing regime signals that the central bank believes Eurozone inflation is under control. The time may be right to shift toward growth-oriented measures.
“In light of the ECB’s monetary policy approach, we recommend investors take a close look at currency risk and consider hedging strategies if they have significant exposure to the euro,” added Green.
He recommends that investors focus on sectors that leverage exports rather than those that rely on euro-denominated sales for the bulk of their revenue. HEDJ checks that box. The export-oriented industrial and consumer discretionary sectors combine for more than 41% of the ETF’s portfolio.
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