The recent standstill in Euro zone growth due to falling inflation and rising unemployment could find some respite in the improving German economy.
Germany, the largest economy in the region and the heart of the Euro zone, has held up pretty well in the third quarter. While the economy grew modestly at 0.3% in the third quarter, well below the growth of 0.7% in the second quarter, both business and consumer sentiment is riding high.
Thanks to the European Central Bank’s rock-bottom interest rate policy, domestic demand and investments in Germany picked up 0.7% and 3%, respectively, in the quarter. In addition, the country has well-equipped infrastructure, a stable labor market, low unemployment, rising wages, moderate inflation and a low government deficit.
This suggests a bullish outlook on the German economy and accelerated growth heading toward the New Year (read: Time for This Top Ranked German ETF?).
Further, Chancellor Angela Merkel finally entered into a grand coalition with the Social Democratic Party, which was the major headwind to economic growth. This clearly paves the way for Merkel to form a government by Christmas and lead Germany for its third term, thereby fueling growth in the economy (read: 3 European ETFs in Focus on German Election Results).
Given this, the country is on a relatively strong footing compared to the other Euro zone members. The nation actually benefited from weakened euro, as it makes exports more competitive. Still, for U.S. investors, a sliding euro hurts total returns, at least when repatriating to dollars.
In such a backdrop, a look at the top ranked hedged euro ETFs in the space could be a good idea for investors concerned about the weak euro while seeking to play in this strong nation. One way to find a top ranked ETF in the space is by using the Zacks ETF Ranking system (read: all the Top Ranked ETFs).
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box or asset class. Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also receive one of three risk ratings, namely Low, Medium or High.
The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of the five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other products with a similar level of risk.
Using this strategy, we have found one ETF – db X-trackers MSCI Germany Hedged Equity Fund ((DBGR - ETF report) ) – in the space that has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating (read: Zacks ETF Rank Guide). The details are highlighted below:
DBGR in Focus
This fund follows the MSCI Germany US Dollar Hedged Index, which looks to provide exposure to German equity markets, while at the same time mitigating exposure to fluctuations between the value of the U.S. dollar and Germany’s currency, the euro (read: New Currency Hedged Germany ETF Hits the Market (DBGR - ETF report) ).
The product holds a small basket of 56 stocks and is tilted toward large cap securities, which account for 85% of assets. It puts nearly 58% of total assets in the top 10 holdings, suggesting heavy concentration. Bayer, Siemens and Basf are the top three elements in the basket.
From a sector look, materials and consumer discretionary each make up for more than one-fifths of the portfolio while financials, industrials and information technology round out to the next three spots. In terms of box style, growth stocks account for only 36% of the portfolio while value takes the crown with 56% exposure keeping a lid on the fund’s risk profile.
The fund has so far attracted $15 million in AUM since its debut six months back. Volume is light though, probably ensuring additional cost in the form of wide bid/ask spread beyond the expense ratio of 0.50%.
As the ETF provides hedging strategies, it seeks to outperform when the euro weakens, and underperform unhedged benchmarks when the euro is surging against the U.S. dollar. The product returned about 15% in the year-to-date period (read: Forget Europe's Currency Risks with These Hedged ETFs).
The currency hedged ETFs are gaining immense popularity in recent months on strengthening U.S. dollar and prospects of higher interest rates. Once again, the fear of Fed tapering is gripping the market following the latest FOMC meeting. The Fed announced that it could curtail the massive asset-purchase program at one of its next few meetings if economic growth warrants.
Given this concern and improving German economic fundamentals, investors could definitely consider this currency hedged ETF. The product looks poised to outperform its counterparts over the coming months
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