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ECB to Wind Up QE Soon? ETFs in Focus

The markets are abuzz with talks of the European Central Bank’s (ECB) possible announcement of QE wind down as soon as in early September. The European Central Bank president Mario Draghi is likely to give a speech at the Federal Reserve's Jackson Hole conference in August for the first time in three years.

In late June, Mario Draghi said that the ECB could modify its sub-zero interest rates and huge bond purchase program since the economy is on the mend. Lower inflation issues are being viewed as short-lived by Draghi, as per an article published on MarketWatch. Investors then took these as signals of a shift from the ECB’s ultra-easy monetary policy. However, any modification in the ECB’s policy are likely to be gradual.

The ECB launched an asset buying program at the start of 2015 and extended the program by six more months to March 2017 at the end of the year. Then the bank announced in December 2016 that it would lower its bond buying program to 60 billion euros a month from 80 billion from April, but extended the program to December 2017, or beyond, should there be any necessity (read: ECB Trims But Extends QE: ETF Winners & Losers).

And now with the economy gaining ground, the ECB is mulling over a gradual retreat from the move. In its June 2017 meeting, the ECB upped the euro area economic growth forecast from 2017 to 2019, and hinted that risks within the region are now "broadly balanced." The bank now expects the underlying inflation to rise moderately over the medium term (read: Currency Hedged Europe ETFs to Buy on ECB Meet).

Chances of QE Taper

A little over 25% of the economists said the ECB will not announce any shift to its policy in September. Almost the same portion sees an extension to its quantitative easing program beyond December, but with a decline in the amount of monthly asset purchases, as per an article published on Reuters. However, everything depends on economic data points. Amid QE taper speculation, Germany's benchmark 10-year bond yield were on an uptrend in recent times.

However, there are certain factors which may keep the ECB from being too hawkish. Consumer prices in the euro area grew 1.3% year over year in June 2017, lower than a 1.4% rise in May. It is the lowest inflation rate this year, thanks to a slowdown in energy prices.

With oil prices showing no signs of improvement in the near term, inflation is likely to be murky ahead. In the June meeting, the bank lowered its inflation projection. So, the ECB may opt for slowing QE taper and a rock bottom-interest rate environment.

As per an article published on Morningstar, “one reason to end QE soon is that the ECB is expected to struggle to find enough bonds to buy later next year….. the ECB to purchase only up to 33% of any Eurozone government's debt, could prove legally and politically tricky…..economists also worry increasingly about a build-up of financial risk after years of ultra-low interest rates.”

ETFs to Play if the ECB Tapers Soon

CurrencyShares Euro ETF FXE

A strengthening economy and QE taper should boost the euro, making FXE an intriguing pick (read: Why & How to Trade the Soaring Euro with ETFs).

SPDR S&P International Financial Sector ETF IPF

As financial stocks perform better in a rising rate environment, the sector benefited from the central bank’s hawkish tone. The fund IPF puts about half of its weight in Europe. Bank stocks account for about 60%, followed by insurance stocks (see all financial ETFs here).

iShares MSCI Europe Financials ETF EUFN

EUFN focuses on giving exposure to the financial sector in Europe. From a geographical perspective, it has high exposure to the U.K., France and Switzerland.

WisdomTree Europe SmallCap Dividend Fund DFE

Since small-cap stocks better reflect the domestic economy and are not hurt by negative currency translation like large cap stocks are, DFE could emerge as a solid pick. The fund yields about 2.77% annually (read: What Makes These Europe ETFs Still Roaring).

iShares MSCI Europe Minimum Volatility ETF EUMV

Now, QE taper can trigger a taper tantrum like what we saw in the U.S. in 2013. Thus, investors may tap EUMV to wait out the volatility.

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CRYSHS-EURO TR (FXE): ETF Research Reports
 
ISHARS-MS EU FN (EUFN): ETF Research Reports
 
ISHARS-MS EU MV (EUMV): ETF Research Reports
 
WISDMTR-EU SC D (DFE): ETF Research Reports
 
SPDR-SP I FINL (IPF): ETF Research Reports
 
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