Watch These Europe ETFs If The ECB Prints Money

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January 9, 2015 5:07pm NYSE:FEZ NYSE:FXE

europeThe European Central Bank (ECB) is apparently set to embark on the final voyage of its easing policy. At least, the ECB president Mario Draghi’s latest comments in a German financial newspaper give such cues.


Going by what Draghi said, we can comprehend that the ECB is all for bank reforms,  levying lower taxes and slashing excessive regulations to accelerate the Euro zone’s recovery, which the president was quoted as saying that it is presently “fragile and uneven”.

The Euro zone’s manufacturing activity expanded slower than initially estimated in December with each month of Q4 recording the lowest PMIs since Q3 of 2013. Such downbeat data definitely creates a backdrop for the initiation of the QE policy.  Thus, investors considered the president’s latest comments as the start of an asset buyback program or some other sort of stimulus program.

Sensing potential easing, the common currency euro plunged to a nine-year low against the greenback. As a result, CurrencyShares Euro ETF (FXE) kick started the New Year with a decent sized loss. Gains were invisible even in the broad large-cap Euro ETFs including FTSE Europe ETF (VGK) and SPDR Euro STOXX 50 ETF (FEZ) which shed in the range of 0.2% to 0.5% as well.

Needless to say, in a falling euro backdrop, hedged Europe ETFs turned out as winners as evidenced by the 0.6% gains offered by WisdomTree Europe Hedged Equity ETF (HEDJ). But some other areas of Europe investing should be closely watched if the ECB jumps on the bandwagon of QE movement like the U.S. and Japan have already implemented.

Normally, smaller companies pick up faster than the larger ones in a growing economy. Since these pint-sized securities usually focus more on the domestic market, these are less ruffled by international worries than their globally exposed larger counterparts. This is especially true as a pile of woes hit the global economy last year. In short, likely monetary easing and currency weakness would support European consumption which in turn may boost small cap ETFs.

Per CNBC, a sluggish euro will trigger purchases by the domestic consumers as they will have to pay less money for buying domestically manufactured goods than imported ones. Low oil prices should be another drive to spur consumer purchases. Investors should note that U.S. small-cap stock index Russell 2000 added about 85% return when the QE policy was underway. So, investors can expect the replication of the same trend on the European front.

Market Impact

Unlike VGK, small-cap ETF WisdomTree Europe SmallCap Dividend ETF(DFE) has added about 0.5%.  Below, we highlight three ETFs that should be in focus if the QE is actually implemented.

DFE in Detail 

This ETF provides exposure to the small cap segment of the European dividend-paying market by tracking the WisdomTree Europe SmallCap Dividend Index. It is one of the popular funds in the European space with AUM of $698 million. The fund charges 58 bps in annual fees from investors.

The fund is heavy on industrials as this segment accounts for more than one-fourth of the portfolio while financials, information technology and consumer discretionary take the remainder. Among countries, United Kingdom (32.6%), Sweden (14.6%), Italy (9.5%) and Germany (8.7%) dominate the holdings list.

Heavy focus on some of the better-positioned nations like the U.K., Sweden and Germany is positive of the fund. Plus, a tilt toward dividends was the icing on the cake in a yield-starved continent.

The fund was down 1.62% in the last one month (the lowest loss in the space), but was up 0.8% in the last three months, indicating commendable performance in the pack of European ETF losers.

MSCI Germany Small Cap Index Fund (EWGS)

Germany has been a better-placed economy in the Euro bloc. Zew Economic Sentiment Index in Germany expanded for the second successive month to34.90 in December of 2014 from 11.50 recorded last month and also surpassed analyst expectations. The number was even higher than Euro Area average of 31.80 and 18.40 touched in the U.K.

This gives EWGS — an ETF with $26.4 million under management — an edge over its other domestic cousins as well as broader Euro zone counterparts. The fund was up 4.44% in the last three month period – the second best show in the European pack, but lost about 2.4% in the last one month.

This article is brought to you courtesy of Zacks.


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