The European Central Bank (ECB) president Mario Draghi finally
signaled that the much-awaited quantitative easing (QE) in the Euro
zone could start if the deflationary environment worsens. On August
22, the ECB president noted that the bank was ready to take action
with all accessible means if
worsens in the common currency bloc.
Investors considered this statement as the start of an asset
buyback program or other sorts of stimulus programs. Sensing a
potential easing, European stocks spiked to the
point this month. Several country and regional indexes added
The investor cheer is justified as the expected cheap money from
ECB should be a boon for the European stocks which, after seeing
some rays of hope last year, have again started to languish this
year on deflationary worries.
Effectiveness of QE
Previously, QE had proven extremely beneficial for the U.S. and
Japanese markets. During the QE era, the key U.S. benchmark S&P
500 skyrocketed about 175%. The U.S. economy also got a boost,
leading the Fed to prepare for an end to its QE program by this
Another example is the Japan model which basically resembles the
Euro zone issues. Japan was weighed down by a 15-year deflationary
streak and weak growth. To battle the situation, in April 2013,
Bank of Japan instigated
of quantitative easing to attain a 2% inflation rate within two
years. Japan's key benchmark Nikkei index soared about 25% till
date since the launch of the monetary stimulus program last April.
Why ECB Could Adopt QE
Quantitative easing is a form of monetary stimulus which is
applicable when any other monetary support fails to provide the
required momentum to economic indicators. In early June, the ECB
announced a cut in its benchmark rate to 0.15% from 0.25%.
Also, the bank introduced a deposit rate of -0.1% which was
previously held at zero percent, the first negative case for a
major central bank (read:
Negative Interest Rates Put These European ETFs in
The region's annual inflation slipped to a 5-year low in July. The
number was 0.4% in July, down from 0.5% in June and 1.6% in July
2013. Negative annual inflation rates were noticed in Greece,
Portugal, Spain and Slovakia. Notably, ECB follows a
directive to maintain inflation rates close to 2%.
On the GDP front, after posting 0.2% growth rate in Q1, the Euro
zone GDP stalled in Q2 confirming that the region's economy is
losing steam. Euro zone's powerhouse - the German economy - in fact
weakened in Q2.
The second largest economy in Euro zone, France, stalled and the
third largest economy, Italy, has already slipped into a recession.
Fresh banking woes were flashed in Portugal. Unemployment in July
reached about 11.5% per a Bloomberg data, not far from the record
high of 12% touched last year (read:
Where Will Europe ETFs Go After Portugal Banking
Though Draghi did not talk about QE in his August 22 dialogue (
) and is still relying on the policy measures adopted in June to
perk up Euro area inflation and growth numbers, any further
deterioration in the medium-term inflation outlook might force him
to go for QE.
Most of the Europe equity ETFs have gained following Draghi's
comment. The Stoxx 600 has registered the largest gain (more than
last week to reflect investors' optimism about the introduction of
asset buyback program (read:
ETF Issuers Still Favor Euro Zone: Two European
The three largest Europe-based ETFs -
FTSE Europe ETF (
iShares MSCI EMU ETF (
SPDR Euro STOXX 50 ETF (
have advanced about 0.58%, 0.79% and 0.63%, respectively. For
investors interested in playing this expected QE euphoria, we
present three ETFs below, each of which also has a favorable Zacks
ETF Rank as well:
Vanguard FTSE Europe ETF (VGK)
VGK is the largest and most popular ETF in the space with an AUM of
$15.5 billion and an average trading volume of more than 3.5
million shares a day. Apart from being the largest, the fund is the
cheapest bet in the space charging 12 basis points as fees.
VGK provides a diversified exposure to a large basket of 515
European companies. Sector-wise, Financials occupies the top spot,
followed by Consumer Defensive and Health Care. Better-positioned
nations including the UK, France, Germany and Switzerland have the
biggest allocation in terms of countries.
The fund returned 12.5% in the past one year but was almost flat
this year. VGK has a Zacks ETF Rank #2 (Buy) with a High risk
db X-trackers MSCI Germany Hedged Equity Fund (
Though Germany sagged in Q2, its economy is sturdier than its other
Euro zone counterparts. So, it's better to focus on a German ETF
without Euro exposure (as easing makes it a waning currency).
Moreover, Germany is an export-oriented nation and poised to
benefit from a weakening in the Euro (read:
Top Ranked Germany Hedged ETF in Focus
DBGR is a hedged German equity ETF providing exposure to 55 firms.
The fund trades in a lighter volume and has amassed only $42
million in assets. The fund focuses on Materials, Consumer
Discretionary and Financials sectors.
Expense ratio came in at 0.45%. DBGR has advanced about 11% in past
one year while it has lost 3% to date. DBGR has a Zacks ETF Rank #1
(Strong Buy) with a Medium risk outlook.
iShares MSCI United Kingdom ETF (
EWU targets the large and mid-cap stocks of the UK. Notably, UK is
yet another European market strong enough to navigate through the
present doldrums, and unlike its counterparts on the euro, has seen
some strength as of late. EWU invests about $4.2 billion in assets
in 109 stocks.
The ETF is heavily focused on Financials, Energy and Consumer
Staples. In terms of holdings,
HSBC, Royal Dutch Shell
and BP plc take the top three spots. The fund charges 51 basis
point fees per year.
EWU has returned about 2.2% on a year-to-date basis and 14% in the
last one-year period. BBH has a Zacks ETF Rank #1 with a Medium
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VANGD-FTSE EUR (VGK): ETF Research Reports
ISHARS-EMU IDX (EZU): ETF Research Reports
SPDR-EU STX 50 (FEZ): ETF Research Reports
DEUTS-XT MS GER (DBGR): ETF Research Reports
ISHARS-UTD KING (EWU): ETF Research Reports
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