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Time to Tap Eurozone ETFs as Rate-Hike Cycle Nearing End?

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In an attempt to tame rising consumer prices, the European Central Bank (ECB) has opted to increase interest rates to an unprecedented level. However, the euro's value declined on Sep 14, 2023 after the central bank hinted at the conclusion of its policy tightening due to economic slowdown.

The ECB's subtle indication that borrowing costs in the Eurozone may have peaked was evident in its statement. This suggested that Thursday's rate hike has placed interest rates at levels that, if maintained for a sufficient duration, may contribute to achieving the ECB's 2% inflation target.

The latest ECB move came on the heels of the ECB's tenth consecutive increase in its deposit rate, up by 25 basis points to 4%, while simultaneously revising down growth projections for the eurozone economy.

ECB Growth Projections

Growth will be sluggish for the rest of 2023 in the face of tighter financing conditions and weak foreign demand. As inflation falls, household income recovers and foreign demand strengthens, the Eurozone economy should grow by 0.7% in 2023 (down from 0.9% projected in June), by 1.0% in 2024 (down from previous projection of 1.5%) and by 1.5% (down from 1.6% forecast in June) in 2025.

Should You Tap Currency-Hedged Eurozone ETFs?

Following the ECB's decision, the euro experienced a considerable drop against the U.S. dollar, reaching its lowest point in three months. Invesco CurrencyShares Euro Trust (FXE - Free Report) can thus be avoided in the near term. Moreover, currency-hedged Euro zone ETFs should be put more focus on, if anyone is interested in the Eurozone equity investing.

Decline in Bond Yields to Boost Euro zone Stocks

The decision's impact extended beyond currency markets, as yields on two-year German Bunds, which are regarded as a benchmark for the Eurozone, saw a fall of 0.04 percentage points, reaching 3.13%. A decline in bond yields should boost Eurozone stocks.

The economic growth environment is still downbeat.  However, investors should note that the interest rates in the Euro zone are still way lower than the United States. Plus, banking earnings in Europe have come in better-than-expected in the second quarter despite an emergence of global crisis in the first quarter (read: Should You Buy Europe Financial ETF EUFN on Earnings Strength?).

Moreover, Europe stocks and ETFs offer handsome dividend yields. High dividend ETFs can be a good investment during times of economic uncertainty, as they provide a steady source of income regardless of market conditions.

ETFs in Focus

Against this backdrop, below we highlight a few high-dividend ETFs that yields higher than the benchmark U.S. treasury yield (4.29% as of Sep 14, 2023).

iShares Currency Hedged MSCI Eurozone ETF (HEZU - Free Report) – Yield 2.30%; Up 1.86% On Sep 14

Xtrackers MSCI EAFE Hedged Equity ETF (DBEF - Free Report) – Yield 4.97%; Up 1.76% On Sep 14

iShares MSCI Europe Financials ETF (EUFN - Free Report) – Yield 4.20%; Up 1.52% On Sep 14

iShares MSCI Norway ETF (ENOR - Free Report) – Yield 4.83%; Up 2.03% On Sep 14 after market

SPDR EURO STOXX 50 ETF (FEZ - Free Report) – Yield 3.26%; Up 1.09% On Sep 14


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