ETFs: A Weapon In Europe's Currency War:

While plenty of attention has been paid to the fact that the U.S. dollar is trading near its highest levels in almost four years against the Japanese yen, market participants are not glossing over the euro's strength against the yen, either.

Trading near 125.40, EUR/JPY is flirting with its highest levels in nearly three years and it is safe to say some European exporters are not too happy with that situation.

Some European policymakers have been vocal with their assertions that the common currency is overvalued relative to other major currencies. French President François Hollande recently stated that, "A monetary zone must have an exchange rate policy. If not, it will be subjected to an exchange rate that does not reflect the real state of the economy," according to a new WisdomTree research note.

Still, the European Central Bank did not cut interest or unveil new monetary easing measures at the conclusion of its policy meeting last week. That does not mean the global currency war is a far flung concept. Should the Eurozone take steps to actively combat the plunging yen, investors will want to consider these two ETFs.

WisdomTree Europe Hedged Equity Fund (HEDJ) As has been noted, select hedged currency ETFs have delivered impressive returns this year. The same can be said of HEDJ, which is up 6.5 percent year-to-date, more than double the returns offered by the Vanguard MSCI Europe ETF (VGK).

Last August, HEDJ was transformed to a Europe-only ETF with an explicit focus on Eurozone-based dividend-paying companies. (At the time of the conversion, DXJ). As DXJ offers investor a hedge on the falling yen, HEDJ is "designed to have higher returns than an equivalent non-currency hedged investment when the value of the U.S. dollar is increasing relative to the value of the euro, and lower returns when the U.S. dollar declines against the euro," according to WisdomTree.

And like DXJ, investors have a tendency to focus on the hedged currency aspect with HEDJ. Obviously, that is a primary advantage of HEDJ, but the ETF sports another feature similar to that of DXJ. That being a screen for companies that derive the bulk of their revenue from the region tracked by the ETF. Arguably, another reason why DXJ and HEDJ have performed well this year has been their exposure to exporters that are not highly dependent on the fragile Japanese and Eurozone domestic economies.

As for HEDJ as a currency war play, take the example of LVMH Moet Hennessy, the ETF's eleventh-largest holding. To say the firm has been active in combating the weaker yen would be accurate.

"During 2012, the firm garnered about 8% of its revenues from Japan—a significant amount. On February 15, 2013, the Louis Vuitton brand raised prices by 12% specifically for sales of its products in Japan," according to WisdomTree Research Director Jeremy Schwartz.

db X-trackers MSCI EAFE Hedged Equity Fund (DBEF) The db X-trackers MSCI EAFE Hedged Equity Fund is not the largest nor is it the most heavily traded ETF on the market, but the fund's year-to-date performance does highlight the advantages of a hedged currency strategy.

At its core, DBEF is a hedged alternative to the highly popular iShares MSCI EAFE Index Fund (EFA). DBEF is the winner to this point in 2013 with a gain of over 10 percent, more than double the upside offered by EFA.

DBEF tracks an index that includes the following countries: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom. That means the ETF is not a pure euro hedge.

However, France, Germany and the Netherlands, all Eurozone members, combine for 24.3 percent of DBEF's weight. DBEF has also benefited from combined 40 percent exposure to the U.K. and Japan because the pound and the yen have been the two worst-performing developed market currencies in the world this year.

BY The ETF Professor