Stock Market: Why ETF Investors Are Fleeing To Europe

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European stock markets rallied following the European Central Bank's announcement that it will maintain its easy-money policies for a long while.

But Vanguard FTSE Europe ETF ( VGK ), the largest ETF tracking the region, hardly budged Thursday because the euro's weakness against the dollar offset stock gains.CurrencyShares Euro Trust ( FXE ), measuring the common currency against the dollar, fell 0.72% to a seven-week low, $129.84.

President Mario Draghi pledged the ECB will keep its policy interest rate at a record low 0.5% for "an extended period of time."

This year's expected inflation rate of 1.4% is below the ECB's target rate of nearly 2%, which means "the ECB has ample scope to cut interest rates, and perhaps even should do so," according to Howard Archer, chief U.K. and European economist at IHS Global Insight. He believes the ECB will likely lower its policy interest rate to 0.25% from 0.50% in the fourth quarter.

"The ECB could very well be prompted into action to counter a further rise in eurozone market rates, particularly if they spike up when the U.S. Federal Reserve starts to taper," Archer wrote in a commentary. "The ECB could also eventually cut interest rates if eurozone recovery stalls over the coming months or even if it fails to gather significant momentum, which is very possible."

Should Be Bullish

Further rate cuts in the currency block would be bullish for the region's stock markets as investors, armed with cheap cash, will embrace risk assets. It would also lower borrowing costs and in turn juice economic growth.

"Mainly, European policymakers have shattered any speculation they will follow a path contemplated by the U.S. and Fed Chairman Ben Bernanke, who is strongly considering a first step toward tightening," Jonathan Citrin, founder and executive chairman of CitrinGroup in Birmingham, Mich., with $60 million in assets under management, wrote in an email.

Record Europe Money Inflow

European equity exchange-traded products attracted the greatest amount of investor inflow, $5.09 billion, in August, while global ETPs saw record outflow, said an ETFGI report released Thursday.

Global ETPs disgorged $16.77 billion in assets, while U.S. stock ETPs bled $16.60 billion and emerging market ETPs were drained by $5.12 billion. Fixed-income ETFs shed $5.23 billion, while precious metals shed $1.08 billion.

U.S.-based investors took money out of U.S. markets in favor of Europe in the face of uncertainties on two fronts, said Deborah Fuhr, managing partner at ETFGI: 1. Potential military invention in Syria's war from the U.S. and/or other countries and 2. How and when the Federal Reserve will start scaling back its bond-buying program.

All the while, Germany, the U.K. and other European countries look relatively safer as they've been showing economic improvement.

"Developed European countries are less affected by the Fed tapering than emerging countries, therefore investors are shifting from emerging market to Europe ETFs for safety," said Minyi Chen, analyst and chief financial officer at TrimTabs Investment Research.

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

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

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