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ECB to End QE Sooner-Than-Expected: ETFs to Win

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The European Central Bank’s (ECB) latest meeting gave hawkish signals. In the meeting, the ECB said in a statement that it will end its bond-buying program in the third quarter, if economic data support the move.

The European Central Bank on Thursday announced it will wind down asset purchases faster than planned as it assesses the economic fallout from Russia’s invasion of Ukraine. Sky-high inflation has been bothering the region while growth could be muted, staging a stage for stagflation.

Energy and commodity prices have surged materially as the Kremlin strengthened its attack on Ukraine, truce talks failed and as Western allies slapped Russia with a pack of sanctions. It means inflation will hit further highs in the coming days, which left no other options to ECB other than walking the policy tightening path. Inflation is set to average 5.1% in 2022, 2.1% in 2023 and 1.9% in 2024, per ECB while real GDP growth is projected to be 3.7% in 2022, 2.8% in 2023 and 1.6% in 2024.

“If the incoming data support the expectation that the medium-term inflation outlook will not weaken even after the end of our net asset purchases, the Governing Council will conclude net purchases under the APP in the third quarter,” the bank said, referring to its asset purchase program, as quoted on CNBC.

Monthly net bond purchases would amount to 40 billion euros ($44.5 billion) in April, 30 billion euros in May and 20 billion euros in June. The central bank kept interest rates unchanged, leaving the benchmark refinancing rate at 0%, the rate on its marginal lending facility at 0.25% and the rate on its deposit facility at -0.5%. Any adjustments in interest rates will hit the market “some time” after asset purchases end, the bank said, and the changes would be “gradual.”

Against this backdrop, below we highlight the a few prospective ETF winners following the ECB meeting.


Invesco CurrencyShares Euro Currency Trust (FXE - Free Report)

The euro was trading around $1.1079 after the ECB decision. The common currency rose 1.6% on Wednesday to register its steepest single day jump in about six years.

WisdomTree Europe Hedged SmallCap Equity Fund (EUSC - 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. Small-cap stocks reflect the picture of the domestic economy better. An improving European economy should be gainful for the small-cap European stocks.

Plus, small-cap stocks generally have lower foreign exposure in their businesses. If the domestic currency gains, pint-size stocks do not feel the pain much as it has lesser export exposure.

First Trust STOXX European Select Dividend Index Fund (FDD - Free Report)

The benchmark bond yields are expected to rise in the Euro zone post the ECB decision. In that case, investors may want to earn higher current income to beat the benchmark yields. High dividend ETFs are excellent choices for this goal. Plus, higher dividends are one of the best bets to tackle volatility in the stock market. Even if the fund falls, higher current income would go a long way in protecting investors’ total returns. FDD yields 3.60% annually.  

iShares MSCI Europe Financials ETF (EUFN - Free Report)

As the ECB trims bond purchases faster-than-expected, 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.

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