IShares Currency Hedged MSCI Eurozone ETF’s HEZU limited scope and high fee may prevent it from outpacing its category peers, warranting a Morningstar Analyst rating of Neutral.

This fund fully replicates the MSCI European Monetary Union 100% Hedged to USD Index, a broad collection of mid- and large-cap stocks from 10 developed countries that use the euro as their primary currency. The index weights holdings by market cap, an efficient approach that harnesses the market's consensus opinion of each stock’s relative value. Stocks that grow in size take up a larger share of the portfolio, while smaller companies that may be struggling take on a less important role. This helps rein in turnover, which has averaged just 5% over the past 10 years.

Focusing exclusively on eurozone stocks constrains this fund’s opportunity set relative to most Europe stock Morningstar Category peers. It does not own stocks from the United Kingdom or Switzerland, which jointly represented 29% of the category average portfolio as of February 2023. The fund leans heavily into French and German stocks to make up the difference. This presents concentration risk, as stocks from these two countries usually constitute about 60% of the portfolio.

Despite considerable country concentrations, the fund still diversifies away most stock-specific risk. It routinely holds around 250 stocks with 25% of assets allocated to its 10 largest positions. Sector composition is similar to the category norm. Consumer cyclical, industrials, and financials stocks lead the way, each collecting about 16% of the portfolio. 

Strength in the U.S. dollar against the euro helped this currency-hedged strategy measure up well versus its unhedged category peers. It has returned 8.2% annualized since its 2014 inception through February 2023, 4.5 percentage points better than the category average. In contrast, its unhedged sibling, iShares MSCI Eurozone ETF EZU underperformed the category average by 17 basis points for the period.

The fund’s 0.53% expense ratio presents a high hurdle to overtake the category average. It’s pricey for an index strategy and doesn’t give the fund a distinct advantage over its peers.

Analyst Rating

Narrow scope and a high fee limit this fund’s appeal.

Associate Analyst

Zachary Evens

iShares MSCI Eurozone ETF

This fund’s narrow scope limits its opportunities and concentrates the portfolio. It earns an Average Process Pillar rating.

BlackRock’s portfolio managers fully replicate the MSCI European Monetary Union 100% Hedged to USD Index. MSCI sorts stocks across 10 developed eurozone countries by their free-float-adjusted market cap and targets those that land in the top 85% by market cap. The strategy uses buffer rules around that threshold to mitigate unnecessary turnover. It applies additional liquidity requirements that can help make the index easier to track. The index weights its final holdings by market cap, which promotes low turnover and reduces the associated trading costs. The index reconstitutes semiannually in May and November and makes smaller adjustments during additional reviews in February and August, such as adding recent IPOs. Finally, the benchmark uses currency-forward contracts to hedge away currency risk.

Average

Process

BlackRock's industry-leading technology, global footprint, and extensive supporting cast earn an Above Average People Pillar rating. The team employs BlackRock's Aladdin platform to fulfill much of its portfolio management tasks, and global trading desks allow traders to conduct foreign transactions in a cost-effective way.

The iShares index equity team has endured some internal turnover at the top over the past few years. But index-tracking performance should remain tight, thanks to heavily automated processes, a large team of seasoned professionals, and several long-tenured managers that remain at the helm. Amy Whitelaw left the team in February 2023 for another role within the organization. Paul Whitehead replaced Alan Mason as a manager in January 2022, when Mason left to focus on the firm's customized institutional indexing capabilities. The broader index equity group, co-headed by Jennifer Hsui and Paul Whitehead, will continue to oversee iShares equity ETFs.

These managers interact with a wider team of traders and managers around the globe to execute the fund's day-to-day operations. The larger number of managers also limits the impact of personnel turnover when it does occur.

Above Average

People

BlackRock offers compelling options across asset classes and vehicles. It earns an Above Average rating for Parent. 
The firm’s approximately USD 8 trillion in assets under management, as of Sept. 30, 2022, gives it unparalleled scale and influence. It is a market-leading index fund provider globally, and its iShares exchange-traded fund franchise offers a low-cost lineup of core funds that investors can use to build a well-diversified portfolio for dirt cheap. The firm can be more adventurous in its ETF launches than some peers, so not everything it launches is appropriate for the masses. As a result, it is likely to have more ETF closures than peers that stick to the basic building blocks.  
The firm’s active fixed-income and multi-asset efforts also stand out as some of the best in the industry. Those benefit from BlackRock’s commitment to building a first-class risk management system via its Aladdin analytics software. The software is also available for sale to other firms and has proved to be a popular option for competitors, a testament to its usefulness. 
More recently, the firm has shifted its focus to ESG offerings and incorporating ESG across its investment lineup, leading to a political backlash in the United States.
BlackRock isn’t the best at everything it tries to do, but retail investors, financial advisors, and large institutions could all build robust portfolios using BlackRock’s products.

Parent

iShares Currency Hedged MSCI Eurozone ETF

HEZU tracks a cap-weighted index of large- and mid-cap securities from the eurozone, while hedging out its exposure to the euro currency relative to the US dollar.

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News for iShares Currency Hedged MSCI Eurozone ETF ETF (HEZU)