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ECB Stays Pat With Its Monetary Policy: ETFs to Gain/Lose

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The European Central Bank left its monetary policy unchanged on Sep 10. The ECB kept its main refinancing rate unchanged at zero percent and pledged to buy up to €1.35 trillion worth of debt through June 2021 under its Pandemic Emergency Purchase Programme. The interest rates on the marginal lending facility and the deposit facility will also remain steady at 0.25% and -0.50% respectively.

A strong euro, which is dampening inflation expectations, led to market expectations that the ECB President Christine Lagarde could “set the stage for more stimulus” later. However, no such efforts were palpable in the meeting. The ECB said that its policy does not target but monitors exchange rate.

ECB said that “in the near term, price pressures will remain subdued owing to weak demand, lower wage pressures and the appreciation of the euro exchange rate, despite some upward price pressures related to supply constraints.” Still, the ECB now expects the Euro zone GDP to contract 8% this year, marking a slight improvement from the 8.7% shrinkage it had projected in June.

Overall, real GDP is projected to decline by 8.0% in 2020 and to rebound by 5.0% in 2021 and 3.2% in 2022. HICP inflation is expected to rise from 0.3% in 2020 to 1.0% and 1.3% in 2021 and 2022, respectively, per ECB.

European stocks did not cheer the meeting outcome instantly as there was no indication of more stimulus in the rhetoric. The pan-European Stoxx 600 fell slightly. Against this backdrop, below we highlight a few ETF strategies to play the meeting outcome.

ETFs to Gain

Invesco CurrencyShares Euro Trust (FXE - Free Report)

The Euro is the currency of 19 European Union countries. The value of the euro is about 10% stronger than what the ECB projected, as the bank’s June forecast projected an exchange rate of 1.08 for the pair. In reality, the pair is hovering around the 1.20 level. ECB’s maintenance of the policy will continue to keep the euro charged up. The fund gained 3.5% in the past three months (read: Euro/Dollar Parity at Two-Year High: ETFs to Gain/Lose).

iShares MSCI Germany Small-Cap ETF (EWGS - Free Report)

Since a stronger currency is good for small-cap stocks that are domestically exposed and have lesser dependence on exports, this small-cap Germany ETF should be a gainer. The fund has gained 8.6% in past three months versus 6.5% gains in the S&P 500.

Xtrackers Eurozone Equity ETF (EURZ - Free Report)

The prospect of better real GDP in 2021 could be beneficial for this broader Euro zone fund. The fund is also a good dividend candidate as it yields 2.44% annually. In the past three months, the fund added 5%.

ETFs to Lose

iShares Currency Hedged MSCI Eurozone ETF (HEZU - Free Report)

A stronger euro is bad for the export-oriented Euro zone. The data revealed in early September showed that the euro-area inflation turned negative in August for the first time in four years. So, this U.S. dollar-hedged Euro zone ETF may feel some pressure from a euro rally. The fund added 0.1% in the past three months.

ProShares UltraShort Euro (EUO - Free Report)

The fund seeks daily investment results, before fees and expenses, that corresponds to two times the inverse (-2X) of the daily performance of the price of the euro versus the U.S. dollar. No wonder, a strong euro is a direct negative for the fund.

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