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Euro ETFs on Volatile Ride: What Next?

Last week, the European Central Bank (ECB) hit headlines by extending its asset buying program by six more months to March 2017. The bank cut its deposit rate by 10 bps shoving it deeper into the negative territory to -0.3%. ECB’s aim is to wipe out deflationary threats and boost economic growth in the common currency bloc.

The markets did not appreciate the decision wholeheartedly as they expected an outsized expansion in the QE policy. To their utter disappointment, the ECB maintained the amount of monthly government bonds purchase at €60 billion. Additionally, the cut in deposit rates was also below the expected 0.15–0.20% (read: ECB Action Disappoints: ETFs in Focus).

As a result, the common currency euro surged and logged its largest one-day gain against the greenback in over six years. CurrencyShares Euro Trust (FXE) was up 3.2% on December 3. But since October, the euro has dropped over 5% against the greenback in anticipation of a very dovish act from the ECB. Several analysts are betting on the Euro-dollar parity as the euro gained strength and the Fed is putting stress on a slower rate hike trail once it pulls the trigger.

Road Ahead

We expect the latest strength in the euro to be short-lived. After all, a recovering U.S. economy and a soft Euro zone economic backdrop will keep the monetary policy divergent for long. The Fed may apply a petite measure of hike now, but will likely speed up policy normalization once the economy gathers steam.  

Across the pond, the ECB might act more benignly if the present quantum and duration of the QE measure fails to pull up the sagging economy. Possibilities of further monetary easing by the ECB and euro’s thinning status as a reserve currency might result in a further slide in euro. Notably, after yuan’s inclusion in IMF’s SDR currency basket, euro lost its weight from 37.4% to 30.93%. The move will take effect from October 2016 (read: IMF Green Signal Put Yuan ETFs in Focus).

Investors should note that FXE is down 10.6% so far this year (as of December 4, 2015). Though it is presently exhibiting a volatile trend on the double whammy of the ECB shock and the confusion over how fast the Fed will proceed on the rate hike path.
Fortunately, ETFs offer several options to investors to accomplish this task. Below, we highlight a few choices in the inverse ETF space. These ETFs profit when the euro declines and may be suitable for hedging purposes against the fall in the currency (see all inverse currency ETFs here).
ProShares Ultra Short Euro ETF (EUO)

This leveraged ETF looks to provide twice the inverse exposure to the performance of euro versus the U.S. dollar on a daily basis.

The product has amassed over $500 million in AUM while it trades at a volume of 800,000 shares daily. However, given its active management style, the ETF charges a hefty annual expense ratio of 95 basis points.

Though EUO lost 6.3% on December 3, the day ECB delivered a less-than-expected action, the fund crawled up over 1.5% on the day next as euro started paring gains. The product has enjoyed a gain of 18.2% on a year-to-date basis on a weak euro. Investors could book more profits off this fund, should the euro continue to struggle.

Market Vectors Double Short Euro ETN (DRR)

This is an exchange-traded note issued by Morgan Stanley. The product seeks to track the performance of the Double Short Euro Index. For every 1% weakening of the euro relative to the greenback, the index normally gains 2%. The choice is an overlooked one with just $54.8 million in AUM. The product charges an expense ratio of 0.65% a year.

On a year-to-date basis, the product has advanced about 21% (as on December 4, 2015). It rose 1.84% on December 4, the day after the ECB action.
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CRYSHS-EURO TR (FXE): ETF Research Reports
PRO-ULS EURO (EUO): ETF Research Reports
MKT-VEC DB S EU (DRR): ETF Research Reports
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