The Federal Reserve appears poised to disappoint on the 2024 interest rate cut front. Barring surprises, the most optimistic of scenarios is calling for a single rate cut in the fall. Some market observers believe it’s possible the Fed won’t pare borrowing costs until next year. However, that doesn’t mean all central banks will be duds when it comes to lower rates this year. Some have already proven as much. It was widely expected the ECB would join the rate cut parade at its Thursday meeting.
Such a move could be a catalyst for various European equity ETFs. The WisdomTree Europe Hedged Equity Fund (HEDJ) merits a place in that conversation.
In fact, HEDJ is one of the large-cap Europe ETFs that could prove most levered to ECB rate cuts. That’s because the fund is currency hedged. That means it’s designed to deliver to investors some benefit as the euro weakens against the dollar.
HEDJ Already Showing Strength
While advisors and investors have grown accustomed a long period of European stocks lagging U.S. counterparts, HEDJ is quietly impressing. Year to date, the ETF trails the S&P 500 by just 55 basis points. When taking valuations and rate cuts into account, HEDJ could be primed to keep pace with or outperform the U.S. equity benchmark as 2024 moves forward.
Regarding ECB rate reductions, some market observers believe it’s a foregone conclusion. They note that the central bank will not disappoint a la the Fed.
“It’s almost certain the ECB will cut rates on Thursday, after keeping them steady since last October, following 10 consecutive rises,” noted deVere Group CEO Nigel Green. “The move has been widely flagged as economists raise concerns about a divergence from the US Federal Reserve and the Bank of England among other central banks.”
The ETF focuses on dividend-paying eurozone companies. Shares of those firms could benefit as rates fall. Those lower rates are apt to entice some investors to embrace longer-duration eurozone debt. But stocks, including those held by HEDJ, offer better long-term return prospects.
“High-dividend-yielding stocks become more attractive as fixed-income yields decline. Investors will be considering adding solid, dividend-paying companies to their portfolios,” added Green.
He noted that defensive sectors also benefit from rate cuts. That could be supportive of HEDJ. It’s an ETF that devotes more than 20% of its weight to consumer staples, healthcare, and utilities stocks.
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