Britain's inability to finalize a Brexit deal with the European Union (EU) by the initially agreed upon March 29 deadline and in several reworked iterations since has kept a dark cloud over the region's stocks in the first seven months of the year.
Investors grew a little more optimistic Tuesday that incoming pro-Brexit British Prime Minister Boris Johnson may have more luck securing a deal with Brussels than his predecessor Theresa May. Johnson, a former London mayor, has previously vowed to negotiate a new Brexit divorce deal with the EU before the scheduled Oct. 31 deadline. The flamboyant and sometimes controversial politician reiterated similar rhetoric after securing victory in the leadership contest, asserting that he will energize negotiations with the EU and get Brexit done.
After Johnson's victory was confirmed, EU leaders said they want to work with him to ratify the Brexit withdrawal deal signed by his predecessor. "We look forward to working constructively with PM Boris Johnson when he takes office, to facilitate the ratification of the Withdrawal Agreement and achieve an orderly Brexit," Michel Barnier, the EU's chief Brexit negotiator, said, per London's Financial Times.
Traders who want exposure to European equities ahead of the revised Brexit deadline should explore these three Europe exchange-traded funds (ETFs). Below, we take a look at the metrics of each and work through several trading possibilities.
iShares MSCI Eurozone ETF (EZU)
Launched in 2000, the iShares MSCI Eurozone ETF (EZU) aims to return investment results that correspond to the MSCI EMU Index – a benchmark comprising large- and mid-capitalization equities from developed market countries that use the euro as their official currency. As a result, the fund primarily holds stocks from France (34.56%) and Germany (27.35%). Nearly 4 million shares change hands daily, which provides ample liquidity for traders to enter and exit positions in the fund, while a narrow 0.03% spread allows scalpers to chase small intraday moves. Investors pay a middling 0.47% annual management fee. EZU controls an enormous $6.07 billion asset base, offers an enticing 3.06% dividend yield, and has a year-to-date (YTD) return of 14.60% as of July 24, 2019.
After starting the year well, the fund retraced below the 200-day simple moving average (SMA) in May as U.S.-China trade tensions, along with ongoing Brexit uncertainty, gripped global markets. The ETF's price bounced back sharply in June and has consolidated in a pennant pattern just below its YTD high in the first two weeks of July. Hopes of a Brexit breakthrough under new British Prime Minister Boris Johnson led to a breakout above the pattern that could trigger further buying. Traders who enter here should consider setting a take-profit order near crucial overhead resistance at $42. Implement risk management by placing a stop below the pennant's lower trendline and amending it to the breakeven point if the price climbs above $40.
iShares MSCI Germany ETF (EWG)
With sizeable assets under management (AUM) of $2.23 billion, the iShares MSCI Germany ETF (EWG) seeks to track the performance of the MSCI Germany Index. The non-diversified fund holds stocks traded primarily on the Frankfurt Stock Exchange, covering the top 85% of German companies by market cap. EWG top-weights the financial sector with an allocation just above 20%. The ETF's top three holdings – business intelligence company SAP SE (SAP), multinational financial services giant Allianz SE (AZSEY), and industrial manufacturing conglomerate Siemens Aktiengesellschaft (SIEGY) – provide excellent exposure to different segments of Germany's economy. A thin 0.04% spread and trading volume of 3.2 million shares per day help keep trading costs manageable. As of July 24, 2019, EWG charges a 0.47% management fee, issues a 2.63% yield, and has returned 10.56% YTD.
The EWG share price broke above the neckline of an inverse head and shoulders pattern in mid-April but has failed to make significant gains since. The bulls still have the balance of power, with a "golden cross" signaling a new uptrend in May and the fund trading toward the top end of its two-and-a-half-month trading range. Like EZU, the price broke above a pennant Tuesday, indicating upside continuation. Those who take a long position should aim to book profits on a test of significant resistance at $29.75. Stops could sit either below yesterday's breakout candlestick or under the 50-day SMA, depending on risk tolerance.
WisdomTree Europe Hedged Equity Fund (HEDJ)
The WisdomTree Europe Hedged Equity Fund (HEDJ), created in 2009, has an objective to offer similar returns to the WisdomTree Europe Hedged Equity Index. HEDJ invests in Eurozone dividend-paying companies that derive a majority of revenue from exports outside the Eurozone, while at the same time neutralizing exposure to fluctuations between the value of the U.S. dollar and the euro. The ETF's basket of roughly 130 stocks provides reasonable diversification, with no holding commanding more than a 6.5% allocation. Average dollar volume liquidity of more than $20 million along with a 0.2% razor-thin spread make the instrument suitable for all trading styles. The fund's 0.58% expense ratio, while not cheap, is reasonable given the use of derivative products to hedge currency risk. HEDJ has net assets of $3.57 billion and is trading up 19.07% on the year, providing similar returns to the U.S. large-cap proxy S&P 500, which has gained 19.89% over the same period as of July 24, 2019.
HEDJ shares rallied above the May swing high in early July before consolidating to form a pennant pattern just below that level. The price surged nearly 2% in Tuesday's trading session to close above the pennant's top trendline and create a fresh 52-week high/all-time high at $67.84. Those who decide to take a trade should think about using a moving average that is more sensitive to recent prices, such as the 10-day SMA, as a trailing stop to let profits run. An initial stop-loss order could sit beneath Tuesday's low at $67.57 or under this month's low at $65.83 to allow for more wiggle room.