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TheStreet Open House

Euro-Denominated ETFs May Recoil Rather Than Spring Forward

Stocks in this article: GREKFXEHEDJVGKEUO

NEW YORK ( ETF Expert) -- In early September, the European Bank put its money where Mario Draghi's mouth was.

Specifically, the congregation of decision makers agreed to purchase unlimited amounts of short-term, troubled country bonds in the event that a a beleaguered sovereignty requested aid. (Note: A country would have to agree to certain reforms, but... who genuinely wants details?)

Apparently, the ECB president's promise was all that world markets needed to hear. Italian bonds and Spanish bonds have since risen dramatically. And Greece? The Global X FTSE Greece 20 ETF (GREK) is up nearly 74% since Draghi exclaimed in late July that the ECB would do "whatever it takes" to keep the euro intact.

All's well that ends well, then?

Not exactly. Country deficits are growing, the region's economy is contracting and financial institutions still hold the ever-volatile sovereign debts. That makes European financial stocks particularly scary.

Additionally, no country has asked the ECB for a bond bailout. It follows that the ECB's commitment has yet to be scrutinized. Would creditor nations like Germany even agree to a monumental transfer of its wealth to Spain and Italy? Can Chancellor Angela Merkel of Germany even manage the political ramifications of supporting neighboring nation bailouts with her own re-election bid in the fall?

It has been a wonderful ride for the CurrencyShares Euro Trust (FXE) since late July. Not only has FXE picked up 8.3% in a short time period, but it remains above intermediate-term (100-day) and long-term trendlines (200-day).

That said, direct or indirect exposure to the currency is a recipe for misfortune. Optimistically, the euro can survive with a modest economic recovery in the second half of 2013.

More realistically, though, there are too many moving parts (e.g., individual country leaders, European Central Bank, International Monetary Fund, private banks, creditors, etc.) for there not to be a reemergence of market pressures.

The good news is... the euro is unlikely to face imminent collapse. On the other hand, I anticipate the euro to fall back out of favor, as the Italian prime minister, Mario Monti, steps down and anti-German rhetoric heats up.

Adventurous traders might consider shorting the currency via ProShares Ultra-Short Euro (EUO). It may make sense at a price point above a short-term trendline (50-day).

Far more importantly for investors, however, is the ability to avoid a euro slide. One who believes that European multi-nationals will survive, even thrive, should look to WisdomTree Hedged European Equity (HEDJ). It will undeperform an unhedged fund like Vanguard Europe (VGK) when the euro is strong, but HEDJ will outperform VGK when the U.S. dollar gains ground on the euro.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Disclosure Statement: ETF Expert is a website that makes the world of ETFs easier to understand. Gary Gordon, Pacific Park Financial and/or its clients may hold positions in ETFs, mutual funds and investment assets mentioned. The commentary does not constitute individualized investment advice. The opinions offered are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert at the site.

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