The official Brexit trigger has implications for specific exchange-traded funds (ETFs) pegged to Europe. To get a better sense of the pros and cons of European ETFs, I turned to my friend and colleague Tom Essaye of The Sevens Report. He has a particularly interesting read on Europe.
Like me, he’s bullish on the segment and for the same basic reasons. First, there is compelling relative valuation in European equities vs. U.S. stocks. Second, there continues to be central bank support from the European Central Bank. Finally, the political risks of investing in Europe, in my view, have been far too overstated.
Valuation wise, Tom notes that the MSCI Europe Index is trading at 15.1 times 2017 earnings, and 13.8 times 2018 earnings. That’s a 17% and 22% discount to the U.S. index valuations, respectively.
So, what is the best way for investors to get long in European equities. Although there are many great funds to choose from, Tom and I are partial to the Wisdom Tree Europe Hedged Equity Fund (HEDJ).
There are a couple of primary reasons for the HEDJ preference. First, if you believe, as I do, that the U.S. dollar is going to appreciate over time vs. the euro, then you want the currency hedge that HEDJ offers.
Second, HEDJ is by far the most-liquid European currency hedged ETF out there. And, for those who are concerned about the any possible Brexit exposure and its negative influence on British stocks, you’re in luck, as HEDJ has virtually no British exposure (just 0.37% of holdings).
