ETF Analysis - Xtrackers MSCI Europe Hedged Equity ETF (DBEU)

TLDR

 

1. It is a fund that follows the European MSCI index but follows the dollar-hedged index.

2. Since the fund hedges against the dollar, the shock absorbing function of the dollar can work when something big happens. (If there is a big incident in the US, the impact will double.)

3. There are many advantages in terms of securing diversified investment in European stocks and dollar assets.

 

Summary

 

The fund is a European equity fund that benchmarks the MSCI Europe US Dollar Hedged Index. Hedged means hedging the movement of currencies in each stock. Xtracker is the ETF brand of Deutsche Bank Asset Management.

 

What does this mean? Well… the Fund invests in European stocks, so it will include stocks from all over the European countries. Therefore, in addition to the stock movement of each country, the value of the asset also fluctuates by the exchange rate against the dollar of each country.

Since the investment is made in dollars, it will be easy to see the result of the operation in dollars. So, it is the index of European stocks converted into dollars and the fund is managed using the index and hedging method.

What is the recent rate of return? Let's look at the picture below.

(Source: Deutsche Bank AG)

The European stock market has been on the rise overall, and since the interest rate for euro is so low, after the euro-dollar currency hedge, rollover is done by swap. In addition, since the euro is a premium currency (it means interest rate for euro is lower than that of dollar), for each rollover, dollar can be purchased relatively cheaper.

It means that every time a rollover occurs, there is a slight exchange gain. The main holdings of the fund is as follows.

(Source: Deutche Bank AG)

As you can see, the fund is investing in major companies in Europe (CH for Switzerland, GB for UK, FR for France, etc.). Therefore, currency hedges should be set to USDCHF, EURUSD, GBPUSD, and so on. The following table is the forward exchange contract that the Fund has.

In the table, you can see that Long Currency is all in USD. In the table, the bank will sign a one-month forward exchange swap contract on around 14th day of each month. Since the interest rate of the above-mentioned European currencies are all lower than the of the dollar, the fund will have a slight currency appreciation by rolling over each month. This is one of the advantages of this fund, but it is really nothing compared to the stock volatility. But it's better than losing a little each month. It is a hundred times better than a fund in Korea where it loses money in both ways.

In many ways, investing in dollars in this fund does not look too bad. Even if the underlying risk in European stock market is inevitable, but the rest of the risk profile is quite favorable for investors.

Frankly speaking, the fund does not suffer much damage even if Europe lost everything down to its last shirt. However, if the US crashes (which is not likely to happen), the loss will be huge because the European stock market will plunge due to US influence and there will be foreign exchange losses.

Risk

1. Liquidity risk

Liquidity risk is not so great because the fund has net assets of about $ 1.6 billion and daily trading volume of about $ 17 million.

2. Credit Risk

Since most of the fund is invested in stocks and the hedging contracts are concluded with banks, it is safe to say that credit risk is not very high.

3. Market Risk

The market risk is the largest because the fund is equity funds, and the currency risk is limited if the investor holds the dollar only because the currency risk is hedged.

However, since exchange risk does not hedge against hedgeable derivatives in line with continuously changing stock balances like the Quanto Swap, even if the exchange rate exposure at the beginning of the month is correct, if the stock prices change during the month, the hedge amount can be higher (over hedge) or lower (under hedge).

If the monthly stock price volatility is constant, it is relatively ok. However, when the stock value changes greatly, such as in the subprime crisis or Greek economy crisis, the exchange rate also fluctuates greatly, so the over hedge or under hedge is a considerable risk.

In such situations, it is usual for dollar hedge to make up a large part of the stock loss, since it is hedged only by dollar and the dollar usually has the role of security currency. This is the situation when you hedge in dollars. Therefore, the hedge portion of the Fund is not bad.

On the other hand, if you hedge against a risky currency such as the Korean won (not a safe currency such as the Japanese yen), you will die when the big event happens because of the KRW depreciation in addition to the stock market crash. This was exactly how Mirae Asset Insight Fund lost its money (A Korean fund).

The main market risk of the Fund is, of course, the risk of fluctuations in the price of its underlying assets. However, it is too obvious and there are about 200 assets to be incorporated into the Fund, and the benchmark index of the Fund has about 400 stocks, which means that individual market risk is not meaningful and there is only the market risk for the whole index.

Conclusion

The fund is said to be following the European index. However, in fact, the expected return depends on how well the US is doing. It is a true dollar investment. It does not look so bad.

Closing

The following is a stock / index ticker if you are interested.

CUSIP 233051853

ISIN US2330518539

Bloomberg Index Ticker: M0EUHUSD