2 ETFs To Consider After The ECB Rate Cut
Europe has been much slower to recover than the US since the financial crisis in 2008 derailed the global economy.
The latest data from the European Central Bank (ECB) are downright gloomy. Economic growth is stagnant, inflation is nonexistent, and the whole economy is teetering on the verge of another recession.
As a result, the ECB is taking their most aggressive action yet to jump-start the economy and stave a potentially devastating deflationary spiral. They’re cutting interest rates, increasing the charge on money banks don’t lend, and introducing asset purchases.
It’s a three pronged attack designed to pump money into the banking system and then charge banks if they don’t put the money to work in the form of new loans to businesses and consumers.
The plan certainly has the potential to help jump-start the economy.
Unfortunately, it doesn’t do anything to address the other fundamental problems many European countries face like government red tape and high tax rates that make it difficult for businesses to operate.
In fact, the biggest boost from the new ECB plan could come in the form of psychology…
Consumers, businesses, and investors view these steps as the things that could jump-start the recovery. And that could be more important to the future of European stock market performance.
The largest US listed ETF that holds European stocks is the Vanguard MSCI Europe ETF (VGK). It has $15.7 billion in assets under management.
The recent price action of VGK is reflective of the poor state of the European economy. VGK is up 15.6% over the last year, but so far in 2014, it’s only up 1.6% and it’s up 2.5% over the last month.
In other words, VGK was down 1% through the first eight months of 2014… it’s only the recent 2.5% uptick in anticipation of the ECB moves that European stocks have moved into positive territory for the year.
If the moves by the ECB successfully reignite the animal spirits among consumers, businesses, and investors, VGK should finish the year on a much stronger note than it has started.
Another thing to keep in mind is the impact that the ECB action will have on the Euro currency. The Euro suffered its biggest one-day drop in value in three years after the ECB plan was announced.
It wouldn’t be surprising to see an increase in volatility of the Euro as the ECB explores these more unconventional tools to boost their economy.
If you’re bullish on European stocks, but want to get rid of the exposure to the Euro, you can use the WisdomTree Europe Hedged Equity Fund (HEDJ). HEDJ provides exposure to European stocks while neutralizing the impact of fluctuations between the Euro and the US Dollar.
So far this year, HEDJ is up 6.7%. It is clearly outperforming VGK, that’s only up 1.6% year-to-date.
The results speak for themselves… hedging the volatility of the Euro and US Dollar has delivered far superior returns so far the year.
Here’s the upshot…
The latest ECB actions should be good for European stocks. But it will also devalue the Euro relative to other major currencies.
Using the WisdomTree Europe Hedged Equity Fund is a great tool to get exposure to European stocks while getting rid of the negative impact of a falling Euro.
Good Investing,
Corey Williams
Category: ETFs, Foreign Market ETFs, Market Analysis
