EUFN Vs. HEDJ: Recent Results Changes The Winner

The article recommends a tactical 'Buy' rating for the iShares MSCI Europe Financials ETF (EUFN), citing its recent outperformance over the last five years and in three of the last four annual periods compared to the WisdomTree Europe Hedged Equity Fund (HEDJ) and broader European equity ETFs. While EUFN, which targets European financials and offers a 4% yield, has lagged over the full decade and exhibits higher volatility, its current factor profile suggests a favorable entry point. The author emphasizes that EUFN's performance history indicates it is more suited as a market-timing instrument rather than a long-term buy-and-hold investment.

Analysis

The iShares MSCI Europe Financials ETF (EUFN) is presented as a tactical 'Buy' based on its recent outperformance against the WisdomTree Europe Hedged Equity Fund (HEDJ) and broader European market ETFs. Despite EUFN's underperformance over the past decade, it has surpassed HEDJ over a five-year horizon and in three of the last four annual periods. This suggests a potential cyclical or momentum-driven opportunity. EUFN provides concentrated exposure to the European financials sector with a 4% yield and an expense ratio of 48 basis points, contrasting with HEDJ's currency-hedged, dividend-weighted strategy focused on exporters. Key risks highlighted are EUFN's significant volatility, evidenced by some of the largest drawdowns among its peers, and the fact its suitability appears tied to market timing rather than a long-term, buy-and-hold strategy. Furthermore, the analysis questions the traditional diversification benefits of international exposure, noting the correlation between US and international stocks has risen to 85% over the last decade, making sector-specific overseas bets like EUFN a more nuanced decision.

Key Decisions for Investors

• Investors with a tactical mandate could consider EUFN to capitalize on its recent performance leadership in the European financial sector, but should be prepared for higher volatility and view it as a market-timing instrument, not a core long-term holding.
• For those seeking a more defensive, long-term European allocation, the currency-hedged and broader-market approach of HEDJ may remain more suitable, given its superior performance over the last decade and EUFN's history of significant drawdowns.
• Monitor EUFN's performance relative to broader European and US financial ETFs, as the recommendation is contingent on the continuation of its recent outperformance, which the analysis suggests is cyclical.