Navigating European Equity Opportunities with BMO MSCI Europe High Quality Hedged to CAD ETF

The BMO MSCI Europe High Quality Hedged to CAD Index ETF (ZEQ.TO) has reaffirmed its role as a strategic tool for Canadian investors seeking exposure to European equities while mitigating currency risk. Despite recent market volatility, the ETF's CAD 0.14 dividend declaration for its June 2025 distribution—payable on July 3—highlights its steady income profile. This article explores how ZEQ's hedging mechanism and the underlying European equity landscape position it as a compelling investment option.

The Currency Hedging Advantage

ZEQ's core strength lies in its hedging strategy, which shields Canadian investors from euro-to-dollar currency fluctuations. While the ETF tracks the MSCI Europe High Quality Hedged to CAD Index, its currency-hedged structure ensures that gains (or losses) are measured in Canadian dollars, eliminating the risk of unexpected losses due to a weakening euro. This is particularly critical given the CAD's 5% rise against the euro since early 2024 (). For example, an investor holding an unhedged European equity ETF like iShares MSCI Europe ETF (EURL.TO) would face currency drag if the euro weakens—a risk ZEQ's hedging neutralizes.

European Equity Value: A Case for Selective Exposure

European equities have faced headwinds, including inflationary pressures and geopolitical uncertainty, but valuations now appear attractively priced. The MSCI Europe Index trades at a forward P/E of 14.2x, below its 10-year average of 15.8x. Sectors such as consumer goods, healthcare, and technology—well-represented in ZEQ—offer resilience in slow-growth environments. Additionally, European companies with strong balance sheets and dividend policies, such as LVMH, Roche, and SAP, dominate the index, aligning with ZEQ's “high-quality” mandate.

Dividend Consistency Amid Volatility

ZEQ's dividend history underscores its reliability. After a 22% cut in June 2024 to CAD 0.14 from CAD 0.18, payouts have remained stable for the past 15 months, with a forward yield of 1.86% as of June 2025. This consistency contrasts with broader European equity ETFs, many of which have seen dividend cuts due to macroeconomic pressures. The ETF's TER of 0.73% is competitive, though hedging costs and index replication expenses should be noted.

Risks and Considerations

• Hedging Costs: While hedging protects against currency risk, it comes with fees. During periods when the euro strengthens against the CAD, unhedged ETFs could outperform ZEQ.
• European Market Risks: Geopolitical tensions (e.g., Ukraine, energy supply chains) and slower GDP growth pose headwinds.
• Buffer Mechanism Expiry: The ETF's 15% loss buffer—which limits downside to 15% in any calendar year—expires on June 30, 2025. Post-expiry, volatility could rise, though the ETF will continue tracking its index without the buffer.

Investment Thesis

ZEQ is ideal for long-term income seekers and investors diversifying beyond North American markets. Its hedging reduces currency risk, making it suitable for retirees or portfolios sensitive to volatility. However, investors should:
1. Monitor the euro's trajectory and ZEQ's hedging effectiveness.
2. Evaluate European equity valuations and sector-specific risks.
3. Consider pairing ZEQ with unhedged European ETFs for balanced exposure.

Conclusion

The BMO MSCI Europe High Quality Hedged to CAD ETF offers a disciplined approach to European equity investing, combining currency protection with exposure to high-quality firms. While risks exist—particularly post-buffer expiry—the ETF's dividend consistency and valuation appeal make it a solid core holding for Canadian investors. As European markets stabilize, ZEQ could emerge as a value-driven income generator in a low-yield world.

Final Note: Always review the ETF's prospectus and consider tax implications. Past performance does not guarantee future results.