Europe & Japan Are Back: Aram Babikian on HDEF, DBEF & the 2026 International Bull Case

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

Chapters

• 0:00 Europe’s Policy Shift And Stimulus
• 2:38 Why International Leads In 2025
• 4:20 Germany’s Trillion And Infrastructure Push
• 6:55 Valuations, Diversification, And Tailwinds
• 9:30 Japan’s Inflation, Wages, And Reform
• 11:50 Introducing HDEF And DBEF
• 13:41 Currency Hedging And Volatility
• 15:51 Closing And Subscribe CTA
• 15:55 The 50-50 Hedge Split Strategy

Transcript

SPEAKER_00: 1:12

Europe, especially Germany, is regaining its appeal as an investment destination. And this is vastly different than the years of fiscal caution that we saw coming out of Europe. And as a result, um, you're having these expansive programs that are focusing on defense infrastructure, green transformation, and high tech. And that becomes very exciting.

SPEAKER_01: 2:03

Today we're diving into two key X tracker ETFs from DWS, HDEF, the high dividend yield ETF, and DBEF, the hedged equity ETF. We're going to break down why international markets have led in 2025 and how DWS is positioning for the year ahead. And what investors should know as we head into 2026. Aram, let's start with the big picture. International markets, especially Europe, have been outperforming this year. What's been driving that strength? And where do you see more runway ahead as we move into 2026?

SPEAKER_00: 2:40

Well, uh, take the second question first. And the answer is yes, I do believe that there's more runway ahead. Um, I believe we are in the first innings. I know we just came off the World Series here, and I do believe that there's a lot more ahead, considering uh this time is different. And I know that that is a very cliche thing that Wall Street uses quite a bit. But um in this case, it really is different because the changes that are being implemented in Europe are structural, they're fundamental, they are ones within policy as well. And as a result of those types of changes, along with the fact that there is stimulus uh ahead that is led by Germany, I do believe that this is something that not only has legs for the near term, but also for much longer term. And DWS being an international global asset manager, um, we like to think of ourselves as the gateway to Europe, being based out of Frankfurt, Germany. And the$1 trillion package that was put forth by Germany that they're looking to implement hasn't even been spent yet. And that$1 trillion, to put in context, is close to$6 trillion if you compare it to the US. So Germany's GDP is roughly$4 trillion. Here in the US, it's$24 trillion. So the$1 trillion into a$4 trillion 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, which represents 11% of German GDP. And that's earmarked to be spent within climate and infrastructure over the next 12 years. Um, so as a result, Europe, especially Germany, is regaining its appeal as an investment destination. And this is vastly different than the years of fiscal caution that we saw coming out of Europe. And as a result, um, you're having these expansive programs that are focusing on defense infrastructure, green transformation, and high-tech. And that becomes very exciting.

SPEAKER_01: 5:16

Just to dive a little bit more into that, as you've said, DWS has been overweight Europe throughout 2025. What specifically are some of the factors that have made that region so compelling? Um, talking specifically about valuations, infrastructure spending, and the defense budgets.

SPEAKER_00: 5:31

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 are near record discounts relative to the US, anywhere from 30 to 40% on their P ratios. But when you combine that now with actual investment and fiscal programs and policy changes that support um the companies where there's tailwinds and energy, digital defense, um, as I mentioned before, it becomes a very compelling scenario, uh, especially for diversification. And when you start thinking about where the US is at in terms of its bull cycle and it's somewhat maturing, uh, you want to look for diversification within your portfolio in other areas that can have quite a lot of potential. And Europe has been really repositioning itself as a strategic, diversified, and policy-supported investment destination. So the continent's ambition for strategic autonomy in climate leadership and digital sovereignty are driving a new era of economic resilience that is also being supported by the current US administration's policies that are forcing Europe to be a lot more self-reliant. And that really presents quite the opportunity for U.S. investors when they diversify their portfolios, um, looking towards international, especially Europe. Now, with that being said, we can't just talk about Europe because MSCI EFA also contains Japan. And Japan is also very interesting because there are a lot of changes that are occurring there as well.

SPEAKER_01: 7:26

That's what I was going to ask you about next was uh Japan. And we're seeing progress on wages, inflation, and uh consumption after decades of stagnation there. What's structurally different this time, and how should investors think about exposure there?

SPEAKER_00: 7:39

First of all, we have to look at um Japan in several ways. 30 years of stagnation creates sort of a sense of trauma that the government, and this is where psychology comes in a bit. The Bank of Japan is very, very aware of what has occurred in the past 30 years. They're taking a very calculated approach to policy. With that being said, they're very data dependent. And the data is quite compelling this time around. Inflation is finally back, and it's been hovering around the 3% mark. And the Bank of Japan is forecasting that it's going to continue into 2026 around the 2% level. This is fantastic news for the Japanese economy. There's also been an increase in wage growth acceleration. Um, nominal wages are rising the fastest rate that they have in the past 30 years. Um, most of that is driven by uh shortage in uh labor and union negotiations as well. And all of this is helping the Bank of Japan normalize their interest rate policy. So they're expected to reach that 1% level, which as a result redefines sort of investor behavior uh where it's encouraging Japanese investors to move towards risk assets a bit more. And like Europe, we're also seeing structural and fundamental changes um with corporate governance reforms. And really, uh Japan is starting to embrace shareholder value quite a bit. So, with all of these uh things uh combined, as well as global investors still being underweight in Japan, it paints a uh a picture for uh bullish sentiment and investment within Japan. And this is where HDEF and uh DBEF really come in, where it is all-inclusive, very broad based of 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 quality companies. So we're not just going into high dividend payers. Instead, you are looking at the persistency and quality of dividend and quality of companies as well as value. And you have HDF there that also um is providing income via the dividend strategy. And then DBEF is currency hedged. Um, and that one is just MSCI EFA 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 moves can really distort returns for US investors in international markets. How does DBEF help reduce that volatility? And why might now be a smart time to hedge?

SPEAKER_00: 10:49

Well, what we've actually been seeing from advisors is they'll do a 50-50 split between HDF and DBEF. And the reason is um predicting currencies is very difficult to do. Even amongst some of the best uh currency uh economists around, it's something that you'll see very difficult to do. With that being said, currencies is also considered not really an asset class. So you have uncompensated risk. You have to have real conviction in order to benefit from any currency moves. And if you kind of extrapolate the US dollar over the past 10, 20, 30 years, you'll see in terms of actual returns, it's sort of zero sum. It's really uh hasn't really netted much returns. So therefore, instead, what it does is it adds volatility to a portfolio. So when you hedge out the currency exposure, you are reducing your volatility. And you can see that in the past 10 years, especially with DBEF versus its underlying benchmark, it's actually delivered close to a 20% reduction in volatility. So that 20% reduction in volatility also would increase your risk return profile. So you've also seen a sharp ratio increase with uh that reduction in volatility and the hedging of DBF. And then you also have a phenomenon known as carry, where if interest rates in the US are higher than some of the interest rates in the other regions, you're able to have positive carry. And that has been the case for DBEF. Then you combine that with HDEF, and you take this year, for example, in the first six months, US dollar had the weakest start to the year, if I'm not mistaken, in the past 50 years. So um HDEF did quite well in the beginning of the year. But then as things normalized and people understood the policy shifts and changes, you actually saw the US dollar come back quite a bit, where DBEF caught up to HDEF. And that's something where it actually um supports the fact of what I mentioned in the beginning. Predicting currency moves is very difficult. So at the end of the day, it's something where if you have a split of 50-50, you're creating a currency neutral trade that can potentially benefit from both sides. Should the US dollar strengthen or 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 bit about 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 see the allocations that they have, they're still very underweight international, they're still underweight um developed, they're underweight emerging markets, they're underweight Japan. Um, and with that, I believe that there seems to be even greater opportunity. Um, like I said in the beginning, I believe we're in the early innings of this international trade. And with the policy shifts as a result of the current um environment and president, the self-reliancy that Europe wants and needs, as well as the same with Japan, um, creates a very opportunistic scenario where um you're seeing value on one side of the coin, and on the other side of the coin, you're seeing investment and policy shifts that are favorable for these countries and continents. And as a result of that, it seems to be a very bullish indicator for uh this area of the market.

SPEAKER_01: 15:07

Well, thank you, Aaron, so much for joining me. And thank you all for watching the lead leg deep dive where we go beneath the surface of products and portfolios shaping global returns. Be sure to like, follow, and subscribe for more conversations that take you behind the headlines.