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ECB Decision Boosts ETFs

Matthew McCall

The European Central Bank unexpectedly cut interest rates and introduced a new bond-buying program to stimulate the European economy. The news sent stocks in Europe higher, and the bullish sentiment spread across the pond to the U.S. stock market.

The move included cutting on three key interest rates by 10 basis point each. The rate on deposit facility is now a negative 0.2 percent.

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The European stock market as a whole has greatly underperformed other regions around the world in the last few months, as fears of a recession have increased. The move by the ECB is seen as a positive for stocks and a negative for the Euro, which fell to the lowest level since July 2013 versus the U.S. dollar.

The pullback from highs set earlier this year combined with the most recent move by the ECB could be the perfect storm for the European equity ETFs. There are numerous ways to play a European stock market rally, and a few of the biggest and broadest could be the best way to take advantage of a continent-wide stock market rally.

iShares Europe ETF

The iShares Europe ETF (NYSE: IEV) tracks 354 European securities across 11 sectors in 14 countries. The top three holdings of the fund include 2.9 percent Novartis AG, 2.9 percent Nestle SA and 2.4 percent Roche Holdings AG, all of which are Switzerland-based companies. IEV has performed well over the last 12 months, up 12.6 percent, but down 2.3 percent over the last half year. However, IEV is showing a favorable chart as of late and is responding well to the most recent news from the ECB.

Vanguard FTSE Europe Fund ETF

The Vanguard FTSE Europe Fund ETF (NYSE: VGK) follows 515 European securities across 11 sectors, making it one of the most diverse European ETFs. Its top three holdings include three percent Royal Dutch Shell plc, 2.6 percent Nestle SA and 2.3 percent HSBC Holdings plc. VGK is up 11.7 percent on the last 12 months, but is down 2.8 percent over the last six.


The iShares MSCI EMU ETF consists of 244 European securities across eight countries, with France and Germany accounting for a total of 60 percent. The top three individual holdings for the fund are 3.5 percent Total SA, 3.2 percent Sanofi SA and 3.0 percent Banco Santander SA. EZU has gained 14.8 percent growth over the last 12 months, but much like other European ETFs, has struggled the last six months and is down 2.9 percent.

Wisdom Tree Small Cap Dividend Fund ETF

The Wisdom Tree Small Cap Dividend Fund ETF tracks 342 European securities in 15 different countries, with the United Kingdom being the most weighted at 32 percent, followed by Sweden at 13 percent. The top three holdings of the fund are Drillisch AG with 1.9 percent, Cofinimmo with 1.6 percent and ERG SpA with 1.4 percent. DFE has performed the best out of these four ETFs, up 17.8 percent over the last 12 months, but has performed the worst over the last six, down 9.5 percent.

The concentration on small-cap stocks typically will offer a higher beta, which will lead to market outperformance in bull markets and bigger losses when stocks fall.

The four listed above give investors a solid starting point when looking to gain exposure to Western Europe. With the ECB on the side of investors, the outlook appears to be one set for higher equity prices.

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