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ECB Leaves Interest Rate Unchanged: ETFs in Focus

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The European Central Bank (ECB) kept its key interest rate unchanged in its latest policy meeting in December, the last for this calendar year.  


ECB held its main refinancing rate at 0%, while the rate on marginal lending was kept intact at a quarter percent and rate on deposits was left unchanged at -0.4%.


The policymakers maintained their October decision to cut the asset buying program by half to 30 billion Euros from January 2018 and continue till September 2018 or beyond if required.


Economic Scenario


Consumer prices in the Euro zone grew 1.4% year over year in October 2017 compared with a 1.5% in September. ECB expects prices to increase 1.5% this year but slow down to 1.4% next year. It expects inflation to reach 1.7% in 2020, still short of ECB’s target of 2%. "Domestic price pressures remain muted overall and have yet to show convincing signs of a sustained upward trend," ECB President Draghi said.


Euro zone’s GDP grew 0.6% sequentially in the July-September period compared with 0.7% in the previous period. The bank raised its full-year GDP growth forecast for 2018 to 2.3% from 1.8% previously, and for 2019 to 1.9% from 1.7% previously.


Eurozone PMI data released by IHS Markit increased to 58 in December from 57.5 in the previous month. This was the highest reading since February 2011 and beat market expectations of 57.2.


Federal Reserve Impact


The Federal Reserve recently hiked its interest rate by 25 basis points. ECB seems to be adopting a different policy than its peers in the developed world.


Per a Reuters article citing ECB Press Conference data, when asked about the divergence in policies between the ECB and the Fed, Draghi said, “The difference in the monetary policy decisions and therefore interest rate decisions (with the U.S.) reflects the different position in the economic recovery, which incidentally is stronger now in Europe. However, it is more advanced in the U.S. We haven’t seen (any negative effect on the euro zone economy from the divergence in policy).”


Let us now discuss a few ETFs that are primarily focused on providing exposure to European equities (see all European Equity ETFs here).


iShares MSCI Eurozone ETF (EZU - Free Report)


This ETF is a play on developed European economies using the common currency with a focus on large and mid-cap equities (read: 5 ETFs to Buy and Hold for 5 Years).


It has AUM of $15.5 billion and charges 48 basis points in fees per year. The fund has a 32.7% allocation to France, 30.0% to Germany and 10.9% to Netherlands (as of Dec 13, 2017). From a sector look, Financials, Industrials and Consumer Discretionary are the top three allocations of the fund, with 20.4%, 15.0% and 13.7% exposure, respectively (as of Dec 13, 2017). Total SA, SAP, and Banco Santander SA are the top three holdings of the fund, with 2.7%, 2.3% and 2.2% exposure, respectively (as of Dec 13, 2017). It has returned 24.8% year to date and 26.1% in a year (as of Dec 14, 2017). It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.


SPDR Euro STOXX 50 ETF (FEZ - Free Report)


This fund is appropriate for investors looking to gain diversified exposure to equities of the euro zone.


It has AUM of $4.3 billion and charges 29 basis points in fees per year. From a geographical perspective, the fund has top allocations to France, Germany and Spain, with 36.6%, 33.3% and 10.2% exposure, respectively (as of Dec 13, 2017). From a sector look, Financials, Industrials and Consumer Discretionary are the top three allocations of the fund, with 22.6%, 13.8% and 11.7% exposure, respectively (as of Dec 13, 2017). Total SA, Siemens AG and SAP are the top three holdings of the fund, with 4.8%, 4.0% and 3.9% exposure, respectively (as of Dec 13, 2017). The fund has returned 21.6% year to date and 23.5% in a year (as of Dec 14, 2017). It has a Zacks ETF Rank #3 with a Medium risk outlook.


Barclays ETN+ FI Enhanced Europe 50 ETN (FEEU - Free Report)


This fund seeks to provide exposure to Europe equities in the mega cap segment.


It has AUM of $524.6 million and charges 76 basis points in fees per year. From a geographical perspective, the fund has top allocations to France, Germany and Spain with 34%, 31% and 13% exposure, respectively.  From a sector look, Financials, Consumer Cyclical and Consumer Staples are the top three allocations of the fund, with 22%, 15% and 14% exposure, respectively. Anheuser Busch Inbev NV, Total SA and Sanofi SA are the top three holdings of the fund, with 5.4%, 4.7% and 4.3% exposure, respectively. The fund has returned 47.4% year to date and 52.0% in a year (as of June 27, 2017).


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