Euro Zone Gets QE Hints, 3 ETFs to Buy on Stimulus Hopes - ETF News And Commentary

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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 deflation 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 highest point this month.  Several country and regional indexes added over 1% .

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 year.

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 $1.4 trillion 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 Focus ).

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 Woes? ).

Though Draghi did not talk about QE in his August 22 dialogue ( per Bloomberg ) 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.

Market Impact

Most of the Europe equity ETFs have gained following Draghi's comment. The Stoxx 600 has registered the largest gain (more than 2%) since February last week to reflect investors' optimism about the introduction of asset buyback program (read: ETF Issuers Still Favor Euro Zone: Two European Funds Planned ).

The three largest Europe-based ETFs - FTSE Europe ETF ( VGK ) , iShares MSCI EMU ETF ( EZU ) and SPDR Euro STOXX 50 ETF ( FEZ ) 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 outlook.

db X-trackers MSCI Germany Hedged Equity Fund ( DBGR )  

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 )

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 risk outlook.

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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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.




This article appears in: Investing , ETFs

Referenced Stocks: VGK , EZU , FEZ , DBGR , EWU

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