December 3, 2025 • 16 mins
International markets are leading and according to DWS’s Aram Babikian, we’re still in the early innings. In part 1 of this Lead-Lag Deep Dive Series, Melanie Schaeffer sits down with Aram to explore why Europe and Japan are gaining momentum, what’s structurally different this time, and how two key XTrackers ETFs, HDEF and DBEF, are positioned for 2025–2026.
They break down:
- Why Europe, especially Germany, is entering a new era of investment
- Japan’s wage growth, inflation stabilization & corporate reforms
- How DBEF helps reduce currency-driven volatility
- Why advisors are using a 50/50 split between HDEF & DBEF
- The global policy shifts creating long-term opportunity
- What investors should expect in 2025, 2026 and beyond
Start your adventure with TableTalk Friday: A D&D Podcast at the link below or wherever you get your podcasts!
Youtube: https://youtube.com/playlist?list=PLgB6B-mAeWlPM9KzGJ2O4cU0-m5lO0lkr&si=W_-jLsiREjyAIgEs
Spotify: https://open.spotify.com/show/75YJ921WGQqUtwxRT71UQB?si=4R6kaAYOTtO2V
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
SPEAKER_00 (01:12):
Europe, especially Germany, is regaining its appeal
as an investment destination.
And this is vastly differentthan the years of fiscal caution
that we saw coming out ofEurope.
And as a result, um, you'rehaving these expansive programs
(01:32):
that are focusing on defenseinfrastructure, green
transformation, and high tech.
And that becomes very exciting.
SPEAKER_01 (02:03):
Today we're diving into two key X tracker ETFs from
DWS, HDEF, the high dividendyield ETF, and DBEF, the hedged
equity ETF.
We're going to break down whyinternational markets have led
in 2025 and how DWS ispositioning for the year ahead.
And what investors should knowas we head into 2026.
(02:26):
Aram, let's start with the bigpicture.
International markets,especially Europe, have been
outperforming this year.
What's been driving thatstrength?
And where do you see more runwayahead as we move into 2026?
SPEAKER_00 (02:40):
Well, uh, take the second question first.
And the answer is yes, I dobelieve that there's more runway
ahead.
Um, I believe we are in thefirst innings.
I know we just came off theWorld Series here, and I do
believe that there's a lot moreahead, considering uh this time
(03:01):
is different.
And I know that that is a verycliche thing that Wall Street
uses quite a bit.
But um in this case, it reallyis different because the changes
that are being implemented inEurope are structural, they're
fundamental, they are oneswithin policy as well.
(03:21):
And as a result of those typesof changes, along with the fact
that there is stimulus uh aheadthat is led by Germany, I do
believe that this is somethingthat not only has legs for the
near term, but also for muchlonger term.
And DWS being an internationalglobal asset manager, um, we
(03:47):
like to think of ourselves asthe gateway to Europe, being
based out of Frankfurt, Germany.
And the$1 trillion package thatwas put forth by Germany that
they're looking to implementhasn't even been spent yet.
And that$1 trillion, to put incontext, is close to$6 trillion
(04:11):
if you compare it to the US.
So Germany's GDP is roughly$4trillion.
Here in the US, it's$24trillion.
So the$1 trillion into a$4trillion economy is similar to$6
trillion into the US economy.
That's quite a lot.
And on the infrastructure side,it's a$500 billion package,
(04:34):
which represents 11% of GermanGDP.
And that's earmarked to be spentwithin climate and
infrastructure over the next 12years.
Um, so as a result, Europe,especially Germany, is regaining
its appeal as an investmentdestination.
(04:55):
And this is vastly differentthan the years of fiscal caution
that we saw coming out ofEurope.
And as a result, um, you'rehaving these expansive programs
that are focusing on defenseinfrastructure, green
transformation, and high-tech.
And that becomes very exciting.
SPEAKER_01 (05:16):
Just to dive a little bit more into that, as
you've said, DWS has beenoverweight Europe throughout
2025.
What specifically are some ofthe factors that have made that
region so compelling?
Um, talking specifically aboutvaluations, infrastructure
spending, and the defensebudgets.
SPEAKER_00 (05:31):
So from a valuation standpoint, we we've heard the
story before about why Europe,and it always was a valuations
play, but the valuations now arenear record discounts relative
to the US, anywhere from 30 to40% on their P ratios.
But when you combine that nowwith actual investment and
(05:53):
fiscal programs and policychanges that support um the
companies where there'stailwinds and energy, digital
defense, um, as I mentionedbefore, it becomes a very
compelling scenario, uh,especially for diversification.
And when you start thinkingabout where the US is at in
(06:15):
terms of its bull cycle and it'ssomewhat maturing, uh, you want
to look for diversificationwithin your portfolio in other
areas that can have quite a lotof potential.
And Europe has been reallyrepositioning itself as a
strategic, diversified, andpolicy-supported investment
(06:38):
destination.
So the continent's ambition forstrategic autonomy in climate
leadership and digitalsovereignty are driving a new
era of economic resilience thatis also being supported by the
current US administration'spolicies that are forcing Europe
(07:00):
to be a lot more self-reliant.
And that really presents quitethe opportunity for U.S.
investors when they diversifytheir portfolios, um, looking
towards international,especially Europe.
Now, with that being said, wecan't just talk about Europe
because MSCI EFA also containsJapan.
And Japan is also veryinteresting because there are a
(07:23):
lot of changes that areoccurring there as well.
SPEAKER_01 (07:26):
That's what I was going to ask you about next was
uh Japan.
And we're seeing progress onwages, inflation, and uh
consumption after decades ofstagnation there.
What's structurally differentthis time, and how should
investors think about exposurethere?
SPEAKER_00 (07:39):
First of all, we have to look at um Japan in
several ways.
30 years of stagnation createssort of a sense of trauma that
the government, and this iswhere psychology comes in a bit.
The Bank of Japan is very, veryaware of what has occurred in
(08:00):
the past 30 years.
They're taking a very calculatedapproach to policy.
With that being said, they'revery data dependent.
And the data is quite compellingthis time around.
Inflation is finally back, andit's been hovering around the 3%
mark.
And the Bank of Japan isforecasting that it's going to
(08:23):
continue into 2026 around the 2%level.
This is fantastic news for theJapanese economy.
There's also been an increase inwage growth acceleration.
Um, nominal wages are rising thefastest rate that they have in
the past 30 years.
(08:45):
Um, most of that is driven by uhshortage in uh labor and union
negotiations as well.
And all of this is helping theBank of Japan normalize their
interest rate policy.
So they're expected to reachthat 1% level, which as a result
(09:06):
redefines sort of investorbehavior uh where it's
encouraging Japanese investorsto move towards risk assets a
bit more.
And like Europe, we're alsoseeing structural and
fundamental changes um withcorporate governance reforms.
(09:26):
And really, uh Japan is startingto embrace shareholder value
quite a bit.
So, with all of these uh thingsuh combined, as well as global
investors still beingunderweight in Japan, it paints
a uh a picture for uh bullishsentiment and investment within
(09:47):
Japan.
And this is where HDEF and uhDBEF really come in, where it is
all-inclusive, very broad basedof MSCI EFA.
On one side, you have HDEF,which is only nine basis points
in terms of the expense ratio,but it's looking at high
dividend, high qualitycompanies.
(10:08):
So we're not just going intohigh dividend payers.
Instead, you are looking at thepersistency and quality of
dividend and quality ofcompanies as well as value.
And you have HDF there that alsoum is providing income via the
dividend strategy.
And then DBEF is currencyhedged.
(10:30):
Um, and that one is just MSCIEFA currency hedged at 35 basis
points.
SPEAKER_01 (10:36):
That's where I wanted to go next uh to talk
about DBEF and currency movescan really distort returns for
US investors in internationalmarkets.
How does DBEF help reduce thatvolatility?
And why might now be a smarttime to hedge?
SPEAKER_00 (10:49):
Well, what we've actually been seeing from
advisors is they'll do a 50-50split between HDF and DBEF.
And the reason is um predictingcurrencies is very difficult to
do.
Even amongst some of the best uhcurrency uh economists around,
(11:09):
it's something that you'll seevery difficult to do.
With that being said, currenciesis also considered not really an
asset class.
So you have uncompensated risk.
You have to have real convictionin order to benefit from any
currency moves.
And if you kind of extrapolatethe US dollar over the past 10,
(11:33):
20, 30 years, you'll see interms of actual returns, it's
sort of zero sum.
It's really uh hasn't reallynetted much returns.
So therefore, instead, what itdoes is it adds volatility to a
portfolio.
So when you hedge out thecurrency exposure, you are
reducing your volatility.
(11:54):
And you can see that in the past10 years, especially with DBEF
versus its underlying benchmark,it's actually delivered close to
a 20% reduction in volatility.
So that 20% reduction involatility also would increase
your risk return profile.
So you've also seen a sharpratio increase with uh that
(12:19):
reduction in volatility and thehedging of DBF.
And then you also have aphenomenon known as carry, where
if interest rates in the US arehigher than some of the interest
rates in the other regions,you're able to have positive
carry.
And that has been the case forDBEF.
Then you combine that with HDEF,and you take this year, for
(12:42):
example, in the first sixmonths, US dollar had the
weakest start to the year, ifI'm not mistaken, in the past 50
years.
So um HDEF did quite well in thebeginning of the year.
But then as things normalizedand people understood the policy
(13:02):
shifts and changes, you actuallysaw the US dollar come back
quite a bit, where DBEF caughtup to HDEF.
And that's something where itactually um supports the fact of
what I mentioned in thebeginning.
Predicting currency moves isvery difficult.
So at the end of the day, it'ssomething where if you have a
(13:26):
split of 50-50, you're creatinga currency neutral trade that
can potentially benefit fromboth sides.
Should the US dollar strengthenor should it weaken?
SPEAKER_01 (13:38):
Just lastly, Aaron, I want to get uh into what you
see for 2026.
If you can talk a little bitabout that and uh it also in
relation to uh those two ETFs.
SPEAKER_00 (13:49):
Well, you're still seeing um a very US-centric
approach to investing.
Um, if you look at a lot of uh,you know, I speak with a lot of
advisors, and when you still seethe allocations that they have,
they're still very underweightinternational, they're still
underweight um developed,they're underweight emerging
(14:10):
markets, they're underweightJapan.
Um, and with that, I believethat there seems to be even
greater opportunity.
Um, like I said in thebeginning, I believe we're in
the early innings of thisinternational trade.
And with the policy shifts as aresult of the current um
(14:31):
environment and president, theself-reliancy that Europe wants
and needs, as well as the samewith Japan, um, creates a very
opportunistic scenario where umyou're seeing value on one side
of the coin, and on the otherside of the coin, you're seeing
(14:53):
investment and policy shiftsthat are favorable for these
countries and continents.
And as a result of that, itseems to be a very bullish
indicator for uh this area ofthe market.
SPEAKER_01 (15:07):
Well, thank you, Aaron, so much for joining me.
And thank you all for watchingthe lead leg deep dive where we
go beneath the surface ofproducts and portfolios shaping
global returns.
Be sure to like, follow, andsubscribe for more conversations
that take you behind theheadlines.
Europe, especially Germany, is regaining its appeal
as an investment destination.
And this is vastly differentthan the years of fiscal caution
that we saw coming out ofEurope.
And as a result, um, you'rehaving these expansive programs
(01:32):
that are focusing on defenseinfrastructure, green
transformation, and high tech.
And that becomes very exciting.
SPEAKER_01 (02:03):
Today we're diving into two key X tracker ETFs from
DWS, HDEF, the high dividendyield ETF, and DBEF, the hedged
equity ETF.
We're going to break down whyinternational markets have led
in 2025 and how DWS ispositioning for the year ahead.
And what investors should knowas we head into 2026.
(02:26):
Aram, let's start with the bigpicture.
International markets,especially Europe, have been
outperforming this year.
What's been driving thatstrength?
And where do you see more runwayahead as we move into 2026?
SPEAKER_00 (02:40):
Well, uh, take the second question first.
And the answer is yes, I dobelieve that there's more runway
ahead.
Um, I believe we are in thefirst innings.
I know we just came off theWorld Series here, and I do
believe that there's a lot moreahead, considering uh this time
(03:01):
is different.
And I know that that is a verycliche thing that Wall Street
uses quite a bit.
But um in this case, it reallyis different because the changes
that are being implemented inEurope are structural, they're
fundamental, they are oneswithin policy as well.
(03:21):
And as a result of those typesof changes, along with the fact
that there is stimulus uh aheadthat is led by Germany, I do
believe that this is somethingthat not only has legs for the
near term, but also for muchlonger term.
And DWS being an internationalglobal asset manager, um, we
(03:47):
like to think of ourselves asthe gateway to Europe, being
based out of Frankfurt, Germany.
And the$1 trillion package thatwas put forth by Germany that
they're looking to implementhasn't even been spent yet.
And that$1 trillion, to put incontext, is close to$6 trillion
(04:11):
if you compare it to the US.
So Germany's GDP is roughly$4trillion.
Here in the US, it's$24trillion.
So the$1 trillion into a$4trillion economy is similar to$6
trillion into the US economy.
That's quite a lot.
And on the infrastructure side,it's a$500 billion package,
(04:34):
which represents 11% of GermanGDP.
And that's earmarked to be spentwithin climate and
infrastructure over the next 12years.
Um, so as a result, Europe,especially Germany, is regaining
its appeal as an investmentdestination.
(04:55):
And this is vastly differentthan the years of fiscal caution
that we saw coming out ofEurope.
And as a result, um, you'rehaving these expansive programs
that are focusing on defenseinfrastructure, green
transformation, and high-tech.
And that becomes very exciting.
SPEAKER_01 (05:16):
Just to dive a little bit more into that, as
you've said, DWS has beenoverweight Europe throughout
2025.
What specifically are some ofthe factors that have made that
region so compelling?
Um, talking specifically aboutvaluations, infrastructure
spending, and the defensebudgets.
SPEAKER_00 (05:31):
So from a valuation standpoint, we we've heard the
story before about why Europe,and it always was a valuations
play, but the valuations now arenear record discounts relative
to the US, anywhere from 30 to40% on their P ratios.
But when you combine that nowwith actual investment and
(05:53):
fiscal programs and policychanges that support um the
companies where there'stailwinds and energy, digital
defense, um, as I mentionedbefore, it becomes a very
compelling scenario, uh,especially for diversification.
And when you start thinkingabout where the US is at in
(06:15):
terms of its bull cycle and it'ssomewhat maturing, uh, you want
to look for diversificationwithin your portfolio in other
areas that can have quite a lotof potential.
And Europe has been reallyrepositioning itself as a
strategic, diversified, andpolicy-supported investment
(06:38):
destination.
So the continent's ambition forstrategic autonomy in climate
leadership and digitalsovereignty are driving a new
era of economic resilience thatis also being supported by the
current US administration'spolicies that are forcing Europe
(07:00):
to be a lot more self-reliant.
And that really presents quitethe opportunity for U.S.
investors when they diversifytheir portfolios, um, looking
towards international,especially Europe.
Now, with that being said, wecan't just talk about Europe
because MSCI EFA also containsJapan.
And Japan is also veryinteresting because there are a
(07:23):
lot of changes that areoccurring there as well.
SPEAKER_01 (07:26):
That's what I was going to ask you about next was
uh Japan.
And we're seeing progress onwages, inflation, and uh
consumption after decades ofstagnation there.
What's structurally differentthis time, and how should
investors think about exposurethere?
SPEAKER_00 (07:39):
First of all, we have to look at um Japan in
several ways.
30 years of stagnation createssort of a sense of trauma that
the government, and this iswhere psychology comes in a bit.
The Bank of Japan is very, veryaware of what has occurred in
(08:00):
the past 30 years.
They're taking a very calculatedapproach to policy.
With that being said, they'revery data dependent.
And the data is quite compellingthis time around.
Inflation is finally back, andit's been hovering around the 3%
mark.
And the Bank of Japan isforecasting that it's going to
(08:23):
continue into 2026 around the 2%level.
This is fantastic news for theJapanese economy.
There's also been an increase inwage growth acceleration.
Um, nominal wages are rising thefastest rate that they have in
the past 30 years.
(08:45):
Um, most of that is driven by uhshortage in uh labor and union
negotiations as well.
And all of this is helping theBank of Japan normalize their
interest rate policy.
So they're expected to reachthat 1% level, which as a result
(09:06):
redefines sort of investorbehavior uh where it's
encouraging Japanese investorsto move towards risk assets a
bit more.
And like Europe, we're alsoseeing structural and
fundamental changes um withcorporate governance reforms.
(09:26):
And really, uh Japan is startingto embrace shareholder value
quite a bit.
So, with all of these uh thingsuh combined, as well as global
investors still beingunderweight in Japan, it paints
a uh a picture for uh bullishsentiment and investment within
(09:47):
Japan.
And this is where HDEF and uhDBEF really come in, where it is
all-inclusive, very broad basedof MSCI EFA.
On one side, you have HDEF,which is only nine basis points
in terms of the expense ratio,but it's looking at high
dividend, high qualitycompanies.
(10:08):
So we're not just going intohigh dividend payers.
Instead, you are looking at thepersistency and quality of
dividend and quality ofcompanies as well as value.
And you have HDF there that alsoum is providing income via the
dividend strategy.
And then DBEF is currencyhedged.
(10:30):
Um, and that one is just MSCIEFA currency hedged at 35 basis
points.
SPEAKER_01 (10:36):
That's where I wanted to go next uh to talk
about DBEF and currency movescan really distort returns for
US investors in internationalmarkets.
How does DBEF help reduce thatvolatility?
And why might now be a smarttime to hedge?
SPEAKER_00 (10:49):
Well, what we've actually been seeing from
advisors is they'll do a 50-50split between HDF and DBEF.
And the reason is um predictingcurrencies is very difficult to
do.
Even amongst some of the best uhcurrency uh economists around,
(11:09):
it's something that you'll seevery difficult to do.
With that being said, currenciesis also considered not really an
asset class.
So you have uncompensated risk.
You have to have real convictionin order to benefit from any
currency moves.
And if you kind of extrapolatethe US dollar over the past 10,
(11:33):
20, 30 years, you'll see interms of actual returns, it's
sort of zero sum.
It's really uh hasn't reallynetted much returns.
So therefore, instead, what itdoes is it adds volatility to a
portfolio.
So when you hedge out thecurrency exposure, you are
reducing your volatility.
(11:54):
And you can see that in the past10 years, especially with DBEF
versus its underlying benchmark,it's actually delivered close to
a 20% reduction in volatility.
So that 20% reduction involatility also would increase
your risk return profile.
So you've also seen a sharpratio increase with uh that
(12:19):
reduction in volatility and thehedging of DBF.
And then you also have aphenomenon known as carry, where
if interest rates in the US arehigher than some of the interest
rates in the other regions,you're able to have positive
carry.
And that has been the case forDBEF.
Then you combine that with HDEF,and you take this year, for
(12:42):
example, in the first sixmonths, US dollar had the
weakest start to the year, ifI'm not mistaken, in the past 50
years.
So um HDEF did quite well in thebeginning of the year.
But then as things normalizedand people understood the policy
(13:02):
shifts and changes, you actuallysaw the US dollar come back
quite a bit, where DBEF caughtup to HDEF.
And that's something where itactually um supports the fact of
what I mentioned in thebeginning.
Predicting currency moves isvery difficult.
So at the end of the day, it'ssomething where if you have a
(13:26):
split of 50-50, you're creatinga currency neutral trade that
can potentially benefit fromboth sides.
Should the US dollar strengthenor should it weaken?
SPEAKER_01 (13:38):
Just lastly, Aaron, I want to get uh into what you
see for 2026.
If you can talk a little bitabout that and uh it also in
relation to uh those two ETFs.
SPEAKER_00 (13:49):
Well, you're still seeing um a very US-centric
approach to investing.
Um, if you look at a lot of uh,you know, I speak with a lot of
advisors, and when you still seethe allocations that they have,
they're still very underweightinternational, they're still
underweight um developed,they're underweight emerging
(14:10):
markets, they're underweightJapan.
Um, and with that, I believethat there seems to be even
greater opportunity.
Um, like I said in thebeginning, I believe we're in
the early innings of thisinternational trade.
And with the policy shifts as aresult of the current um
(14:31):
environment and president, theself-reliancy that Europe wants
and needs, as well as the samewith Japan, um, creates a very
opportunistic scenario where umyou're seeing value on one side
of the coin, and on the otherside of the coin, you're seeing
(14:53):
investment and policy shiftsthat are favorable for these
countries and continents.
And as a result of that, itseems to be a very bullish
indicator for uh this area ofthe market.
SPEAKER_01 (15:07):
Well, thank you, Aaron, so much for joining me.
And thank you all for watchingthe lead leg deep dive where we
go beneath the surface ofproducts and portfolios shaping
global returns.
Be sure to like, follow, andsubscribe for more conversations
that take you behind theheadlines.
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