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2 ETF Plays to Ride the Euro-Coaster

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I’ve heard several noted investors comment in the past few years about the difficulty of investing in today’s markets. I understand their sentiment as I too, am on the lookout for opportunities. That said, opportunities do emerge at various times and it’s up to us, as advisors, to be ready to act.

One of the most recent opportunities was the Swiss National Bank’s decision to discontinue its support of the euro and the European Central Bank’s decision to engage in quantitative easing. When the SNB made its announcement, the Swiss franc soared 30%, resulting in an estimated aggregate loss of $100 billion for the largest Swiss-based exporting companies.

When the ECB announced its QE program a few days later, the amount was more than was expected and the decline in the euro intensified. Whenever a currency moves this drastically, opportunities abound. In light of these decisions, I bought two ETFs. The first is the PowerShares DB US Dollar Bullish ETF (UUP) and the other is the WisdomTree Europe Hedged Equity Fund (HEDJ).

UUP is a basket of foreign currencies against the U.S. dollar. The dollar has actually been on the rise since August (approximately) as the Federal Reserve tapered off its QE program. Although I should have taken this position sooner, I believe the greater move is yet to come as the euro may even reach parity with the dollar.

The other ETF I bought is a bit more interesting. HEDJ invests in stocks of European companies that derive 50% or more of their revenue from exports. Therefore, HEDJ should do well when the euro declines and stocks rise.

Will European stocks actually rise? I believe they will for a few reasons: QE and a falling currency. It’s pretty well established that central bank QE helps stocks. In addition, a declining euro makes European exporters more competitive, which is good for profits and stock prices.

However, even if stocks do rise in Europe, a U.S. based investor faces another challenge: a rising dollar. For example, if European stocks rise 10% (in euro terms) and the U.S. dollar rises 10% against the euro, a U.S.-based investor would essentially break even. Therefore, in light of the rising greenback, when investing in European stocks, it’s important to hedge the currency. Fortunately, HEDJ hedges the currency, which is good for a U.S. investor.

We’ve just discussed two good examples of opportunity seeking. Of course, there are others. For instance, what will the death of the Saudi King mean to the price of oil? There is a trade there, but it will depend on his successor’s view on oil production and prices. It may be a challenging environment, but it’s also interesting. Good luck!

Until next time, have a great week, and thanks for reading.


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