The European Central Bank (ECB) will slow down emergency bond purchases over the coming quarter. This would be a step forward for the ECB toward unwinding the emergency aid that has shored up the Euro zone economy during the coronavirus pandemic.

The ECB did so by lowering the pace of its Pandemic Emergency Purchase Programme (PEPP), which has kept borrowing costs low as governments took on extraordinary amounts of debt to finance the response to the pandemic.

However, ECB President Christine Lagarde indicated that the move is not equivalent to tapering. Lagarde shoved the decision on how to wind down the 1.85 trillion-euro PEPP to December and stressed that, even if that happens, the ECB will make sure of the availability of cheap credit in order to boost inflation to its 2% target.

In the past two quarters, the bank has purchased around 80 billion euros worth of debt each month. Analysts believe that prior to the December meeting, bond purchases would drop to between 60 billion and 70 billion euros in those months, per a Reuters article.

The ECB boosted its growth forecast for this year to 5% from the previous 4.6% target and raised inflation expectations. Inflation is being seen at 2.2% for this year, and may fall to 1.7% next year and 1.5% in 2023 – way behind the ECB's target.

Fed to Move in Same Way?

Such a move from the ECB may trigger Fed’s taper talks. In any case, markets were abuzz with such speculation in August. This move is more meaningful for the United States as U.S. inflation is running high. Federal Reserve Bank of New York President John Williams said the U.S. central bank is likely still on track to slow the pace of its bond-buying stimulus effort this year, although he did not mention the timeframe (read: Top ETF Stories of August).

Against this backdrop, below we highlight a few ETFs that could be the winning bets ahead.

ETFs in Focus

Invesco CurrencyShares Euro Currency Trust (FXE Quick QuoteFXE - Free Report)

Assuming that the ECB will be more proactive and prompter on the QE tapering matter than the Fed, euro will gain strength over the greenback.

iShares MSCI Europe Financials ETF (EUFN Quick QuoteEUFN - Free Report)

If the ECB starts trimming bond purchases soon, the yield curve will likely steepen ahead. This is especially true given that the economic growth forecast has been beefed up. Financial stocks perform better in a rising rate environment. As banks seek to borrow money at short-term rates and lend at long-term rates, a steepening yield curve earns more on lending and pays less on deposits, thereby leading to a wider spread. This will expand net margins and increase banks’ profits.

iShares U.S. Regional Banks ETF (IAT Quick QuoteIAT - Free Report)

The same is likely to happen on the other side of the pond. As regional banks fare well in a steepening-yield-curve environment, IAT has chances of gaining ahead on speculation that the Fed may follow the ECB suit.

iShares Russell 2000 Value ETF (IWN Quick QuoteIWN - Free Report)

Small-cap stocks tend to outperform in a growing domestic economy. Rapid vaccination and stimulus rollout are great positives for the segment. Honing in on the value spectrum in the small-cap segment would be a great idea amid taper tantrum. Value stocks tend to perform in a rising rate environment.

WisdomTree Europe Hedged SmallCap Equity Fund (EUSC Quick QuoteEUSC - Free Report)

The fund looks to provide exposure to the European equity markets while at the same time neutralizing exposure to fluctuations of the Euro movements relative to the U.S. dollar.As explained above, small-cap stocks reflect the picture of the domestic economy better. An upbeat European economy should be gainful for the small-cap European stocks.