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ECB Surprisingly Dovish: Play Currency-Hedged Euro Zone ETFs

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The European Central Bank’s (ECB) latest meeting on Mar 7, 2019 hinted at moderation in economic growth and the need to keep policies accommodative. The ECB delayed an interest rate rise, cut GDP growth outlook for 2019 and 2020 and restarted a stimulus programme of cheap loans to bolster the struggling economy.

The ECB’s new targeted refinancing operations (TLTRO-III) stimulus program will run from September 2019 to March 2021. The loans will give European banks access to lower rates, enabling them to lend money to consumers, which in turn can boost economy. This is the third stimulus injection from the ECB since 2014.

Following the comments of ECB president Mario Draghi, Euro ETF Invesco CurrencyShares Euro Trust (FXE - Free Report) lost about 1.2% on Mar 7. Euro against the greenback suffered especially given the recent dollar rally on the U.S. economic growth. The dollar fund Invesco DB US Dollar Index Bullish Fund UUP added about 1.4% in the past month. Notably, the ECB move comes as a surprise to the analysts.

Inside the Lackluster Growth Picture

The ECB anticipates Eurozone GDP to advance only 1.1% in 2019, 0.7 percentage points down from its December 2018 prediction. It estimates growth of 1.6% in 2020, compared with December 2018 prediction of 1.7%. The bank recognized that Europe's slowdown was longer and deeper than anticipated.  Inflation for 2019 is expected to be 1.2%, down from an earlier forecast of 1.6%.

Germany, the Euro zone's biggest economy, stagnated in the fourth quarter while Italy went into recession. The Eurozone economy grew 0.2% sequentially in the fourth quarter of 2018, which was the lowest since the second quarter of 2014.

Will Stocks Surge?

The continuation of the easy money policy and a weaker Euro should boost the currency-hedged Euro zone ETFs in the near term (see all European Equity ETFs here).

Currency-Hedged ETFs Winning Proposition

WisdomTree Europe Hedged SmallCap Equity Fund EUSC

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 US dollar. Italy (25.2%), France (15.9%), Germany (15.2%), Finland (10.5%) and Spain (10.1%) are the top five geographic allocations for the fund.

Franklin FTSE Europe Hedged ETF FLEH

The underlying FTSE Developed Europe RIC Capped Hedged Index represents the performance of large and mid-capitalization stocks domiciled in European countries classified as Developed. United Kingdom, France, Switzerland and Germany get a double-digit exposure to the fund. The fund charges 9 bps in fees.

iShares Currency Hedged MSCI Switzerland ETF HEWL

The fund gives exposure to stocks traded mainly on the Zurich Stock Exchange with the currency risk of the securities included in the Underlying Index hedged to the U.S. dollar on a monthly basis. Healthcare, consumer staples and financial sectors occupy about 70% of the fund (read: 4 Country ETFs Up Double Digits Despite Trump's Tariffs).

iShares Currency Hedged MSCI Eurozone HEZU

Though the non-currency hedged version of the Eurozone ETF iShares MSCI Eurozone EZU lost about 1.8%, its currency hedged version retreated about 0.6% on Mar 8.

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