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ETFs to Gain & Lose as ECB Starts QE, Cuts Rates

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As widely expected, the European Central Bank (ECB) slashed its main deposit rate by 10 basis points to negative 0.5% — a record low but on par with market expectations — and launched a quantitative easing (QE) program from Nov 1. The QE program will call for asset purchases worth 20 billion euros per month for as long as the economy needs. This marks the second round of QE from the ECB, the first having occurred four years ago (read: ECB May Cut Rates in September: ETFs in Focus).

“In view of the weakening economic outlook and the continued prominence of downside risk, governments with fiscal space should act in an effective and timely manner,” Mario Draghi said at one his last meetings in his eight-year tenure as the ECB president.

Growth & Inflation Outlook Tempered

The outlook for real GDP growth has been curtailed by 0.1 percentage points for 2019 to 1.1% and by 0.2 percentage points for 2020 to 1.2%. The real GDP growth expectation for 2021 is forecast at 1.4%. The outlook for HICP inflation has also been revised down by 0.1 percentage points for 2019 to 1.2%, by 0.4 percentage points for 2020 to 1% and by 0.1 percentage points for 2021 to 1.5%.

Draghi also cautioned about the rising risks of a Eurozone recession, with many economists believing that Germany’s economy has already started shrinking. Additionally, “the ECB changed its TLTRO (targeted long-term refinancing operations) rate to provide more favorable bank lending conditions and match that of its refinancing rate, erasing a previous 10 basis point spread,” per CNBC.

Low rates are likely to stay in the Euro zone. The ECB’s likely next chief Christine Lagarde also hinted that she would stick to Mario Draghi’s expansionary monetary policy. On Aug 30, Lagarde noted that the European Central Bank (ECB) still has room to slash interest rates should the need arise, although this may cause a financial stability risk.

Market Reaction

Euro zone bond yields fell and the euro deteriorated as a result of the new measures. Germany’s benchmark 10-year bond yield slipped 8 basis points to -0.64%, following the ECB announcement.

In case of further ECB stimulus, the following ETFs will the losers and gainers.


Invesco CurrencyShares Euro Currency Trust (FXE - Free Report)

The fund tracks the price of the Euro, which is the currency of 19 European Union countries. Such easing is likely to weigh on the currency’s strength.


WisdomTree Europe Hedged Equity Fund HEDJ

The continuation of easy money policy and a weaker Euro should boost the currency-hedged Euro zone and Europe ETFs in the near term (read: Europe ETFs Likely to Gain From Low Rates After Draghi's Tenure).

iShares International Treasury Bond ETF IGOV

Since easy money policy normally cut yields and bond prices are inversely related to yields, the fund IGOV benefited from the trend. It has sizable exposure to Europe.

First Trust STOXX European Select Dividend Index Fund FDD

Amid low rates, demand for high-yielding products should grow. So, ETFs like FDD may gain. The fund yields 5.23% annually.

iShares MSCI Europe Financials ETF EUFN

Financial stocks normally underperform in a low-rate environment. However, more stimulus means more activities in the economy and greater dependence on financial institutions. This is why EUFN may also stay strong.

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