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ETF News And Commentary

While the Eurozone appears to be back on track after a two-year debt crisis, the recent rate cut by the European Central Bank (ECB) has led to questions about the common currency. 
 
Thanks to the steep decline in CPI inflation that hit as low as 0.7% in October and the rising worries about the region’s banking sector’s liquidity, the ECB has apparently resorted to such a move. Notably, the ECB follows a directive to maintain inflation rates close to 2%.
 
The ECB slashed its benchmark interest rate 25 basis points to a record low of 0.25% that strained the euro against the greenback. Following the announcement, the euro currency slumped against the dollar by about 1%. Added to this, a better-than-expected U.S. economic data again stirred up the possibilities of the Fed’s tapering which is likely to push up the dollar further.
 
ETF Impact
 
Following the news, CurrencyShares Euro Trust (FXE - ETF report) – designed to track the performance of the euro against the dollar – lost 0.7%.  We are maintaining our strong sell recommendation on this Euro ETF. As a result, investors who are bearish on the euro right now, definitely for a valid reason, may consider a near-term short on the space.

Fortunately, ETFs offer several options to investors to accomplish this task. Below, we highlight a few of the options in the inverse ETF space. These ETFs make a profit when the euro declines and are suitable for hedging purposes against the fall in the currency (Read: Guide to the 10 Most Popular Leveraged Inverse ETFs).

ProShares Ultra Short Euro ETF (EUO - ETF report)

This leveraged ETF was launched in November 2008 and 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 $436.6 million in AUM while it trades at a volume of 700,000 shares daily. However, given its active management style, the ETF charges a hefty annual expense ratio of 95 basis points.

Following the rate cut announcement, EUO crept up 1.47% (as on November 7) although the product suffered a loss of 5.42% on a year-to-date basis thanks to the strength of the euro earlier in the year (read: Is Rising Euro hurting Euro-zone?).

Investors could book more profits off this fund, should the euro continue to struggle.

Market Vectors Double Short Euro ETN (DRR - ETF report)

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 $80.9 million in AUM. The product charges an expense ratio of 0.65% a year.

While on a year-to-date basis, the product shed 5.35% (as on November 7, 2013), it rose 1.37% following the announcement.

Bottom Line

Although after prolonged weakness, the euro zone returned to growth in the second quarter of this year, the growth rate was soft at 0.3%. It is quite clear that the region is far from being stable and still needs time and stimulus.  

Further, with nearly four-year lows of inflation and a record-high unemployment report in September, the European Union lowered its euro-zone GDP growth forecast for next year and raised its unemployment estimate. Thus, pressure on euro could remain in the coming days.

In such a scenario, the ECB will certainly leave no stone unturned to trigger growth. A strengthening euro is likely to hurt the company’s export profile, which is why the ECB tries to keep a check on further euro appreciation.

Given this, investors can ignore the euro at the current level or book profit out of some inverse products. However, these products should only be considered for very short-term trading purposes, but they could be interesting over the next few days if we see some more euro weakness.

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