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ECB Expands & Extends Bond Buying: ETFs to Win

·4 min read

In its latest move to prevent an economic fallout from coronavirus, the European Central Bank (ECB) boosted its bond-buying program on Jun 4. The ECB raised the size of its Pandemic Emergency Purchase Programme (PEPP) to €1.35 trillion ($1.52 trillion) from €750 billion and extended it until June 2021 at the earliest.

The bank also vowed to reinvest proceeds until at least the end of 2022. In March, the ECB announced the buying of government and private sector bonds as well as commercial paper till year-end. The ECB President Christine Lagarde believes the total QE size now should be “appropriate” to bring inflation “significantly closer” to its pre-coronavirus path (read: ETFs to Gain on ECB's Coronavirus Emergency Stimulus Rollout).

However, since the onset of the crisis in March, the ECB has not cut its deposit rate further into the negative territory. The ECB’s Pandemic Emergency Purchase Programme would be “aimed at keeping borrowing costs down to support the outlook for Europe’s economy and make sure the bank’s low benchmark rates keep getting through to businesses and consumers.”

Apart from the latest virus-beating stimulus, there is the existing ECB monetary easing program, which entails 20 billion euros per month in existing bond purchases, up to 2.3 trillion euros in negative interest credit offered to banks and a negative rate on deposits it takes from commercial banks of minus 0.5%.

The move should benefit European economies and stocks over the long term. In any case, financial markets of Europe have showed resilience to economic weaknesses in recent weeks, with Eurozone shares now less than 20% below their February peak. Easing lockdowns are also contributing to market gains.

Apart from a super-dovish ECB, the European Commission also recently unveiled a plan to borrow 750 billion euros on the market and then disburse to EU countries, which will include 500 billion euros in grants and 250 billion euros in loans. This will help them recover from the coronavirus slump (read: Time for Europe ETFs on Stimulus Optimism?).

Growth Projections

The ECB now expects the Euro zone economy to shrink 8.7% this year, before rebounding to 5.2% growth in 2021 and 3.3% in 2022. In March, the ECB forecast GDP for 2020 at 0.8%. The central bank also said headline inflation will likely be 0.3% in 2020 and 0.8% in 2021, way below the 2% target.

Against this backdrop, we highlight a few Europe-based ETFs (both equities and bonds) that could gain from the ECB move.

iShares International Treasury Bond ETF IGOV

Since easy money policy normally cuts yields and bond prices are inversely related to yields, the fund IGOV benefited from the trend. It has sizable exposure to Europe.

SPDR EURO STOXX Small Cap ETF SMEZ

The underlying EURO STOXX Small Index provides a representation of small companies across the Eurozone. The fund is heavy on Germany and France and has double-digit focus on Industrials, Health Care, Financials and Real Estate.

Global X Scientific Beta Europe ETF SCID

The fund seeks to outperform cap weighted indexes with similar volatility through a multi-factor investment strategy rooted in academic research. Britain, France, Germany and Switzerland are the top geographies in the fund while industrials, financials and consumer staples have a double-digit weight each.

Invesco CurrencyShares Euro Trust FXE

Though such monetary policy easing is negative for the home currency, the raft of stimulus measures, both fiscal and monetary, may bode well for the euro as the economies and the businesses will gain strength.

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Invesco CurrencyShares Euro Trust (FXE): ETF Research Reports
 
Global X Scientific Beta Europe ETF (SCID): ETF Research Reports
 
iShares International Treasury Bond ETF (IGOV): ETF Research Reports
 
SPDR EURO STOXX Small Cap ETF (SMEZ): ETF Research Reports
 
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Zacks Investment Research
 
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