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ECB Considers Further Stimulus: ETFs to Top & Flop

Sanghamitra Saha

The Euro zone indicated on Jun 18 that it could restart money printing to boost its ailing economy even though the ECN ended QE in 2018. The stimulus moves could be cutting rates even further and other expansionary measures. Draghi ruled out concerns that the ECB was short of means for any new stimulus measures.

Already, the ECB pushed back the timing of its first-rate hike in nearly eight years to the second half of 2020 at the earliest during its June meeting, thanks to global growth concerns and tepid inflation outlook.

ECB president Draghi hinted that upcoming economic indicators point to persistent softness. Risks are skewed toward the downside. The rising threat of protectionism, possible U.S. sanctions on EU, Brexit issuers, U.S.-China trade war and the vulnerabilities in emerging markets are compelling the ECB’s dovish approach.

The continuation of trade war related risks has taken a toll on exports and in particular on manufacturing. The inflation has also been tame, with the annual figure of 1.2% still far below the bank's target of about 2%.

If the ECB rolls out more stimulus, the following ETFs will the losers and gainers.

Winners

International Treasury

After Draghi’s comments, the benchmark German bund yields fell to -0.30% and French 10-year yields turned negative for the first time on Jun 18. Since yields and bond prices are inversely related, this fund iShares International Treasury Bond ETF (IGOV) (which has a sizable exposure to Europe), gained 0.1% on Jun 18.

Currency-Hedged Large-Cap Stocks

The continuation of the low-rate policy and a weaker Euro should boost the currency-hedged Euro zone ETFs in the near term. iShares Currency Hedged MSCI Eurozone ETF HEZU and Xtrackers MSCI Eurozone Hedged Equity ETF (DBEZ added about 2% and 1.9%, respectively, on Jun 18.

Dividend

Amid low rates, demand for high-yielding products should grow. So, investors can bet on ETFs like First Trust STOXX European Select Dividend Index Fund FDD (up 1.14% on Jun 18 and yields about 8.66% annually) and ProShares MSCI Europe Dividend Growth ETF EUDV (up 1.4% on Jun 18 and yields 2.18% annually).

Small Cap

Low interest rates and stimulus may help the domestic-focused, small-cap ETFs to some extent. WisdomTree Europe Hedged SmallCap Equity Fund EUSC added about 1.12 % on Jun 18.

Financials

Financial stocks normally underperform in a low-rate environment. However, more stimulus means more activities in the economy and the more dependence on financial institutions. This is why iShares MSCI Europe Financials ETF EUFN advanced a modest 1% on Jun 18.

Losers

Euro

One of the biggest losers will be the euro. Talks of more monetary stimulus caused Invesco CurrencyShares Euro Currency Trust FXE to lose about 0.2% on Jun 19.

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WisdomTree Europe Hedged SmallCap Equity Fund (EUSC): ETF Research Reports
 
iShares MSCI Europe Financials ETF (EUFN): ETF Research Reports
 
Xtrackers MSCI Eurozone Hedged Equity ETF (DBEZ): ETF Research Reports
 
Invesco CurrencyShares Euro Trust (FXE): ETF Research Reports
 
ProShares MSCI Europe Dividend Growers ETF (EUDV): ETF Research Reports
 
iShares Currency Hedged MSCI Eurozone ETF (HEZU): ETF Research Reports
 
First Trust STOXX European Select Dividend Index Fund (FDD): ETF Research Reports
 
iShares International Treasury Bond ETF (IGOV): ETF Research Reports
 
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