ECB's Dovish Taper Boosts These ETFs

In a historic meeting, the ECB announced that it would extend its asset purchase program through September 2018 at a reduced rate. The meeting was historic in the sense that market watchers expected an outright hawkish ECB after a five-year long sovereign debt crisis and deflationary pressure. The Oct 26 meeting marked the ECB’s first withdrawal of stimulus.

As per an article published on Wall Street Journal, Draghi’s open-ended nature of the QE program gave cues that the ECB might not leave the program in September 2018 suddenly. The broader market can see further lessening in the share repurchase clip or even a further extension, as per the article. The economists believe that Draghi’s tone is still-accommodative.

The euro dropped to the lowest level since late July on the news of support extension. Draghi indicated that "very favorable financing conditions” are “still needed for a sustained return of inflation rates toward levels that are below, but close to, 2 percent." The euro ETF CurrencyShares Euro ETF (NYSE:FXE) FXE was down about 1.3%. The fund gained about 0.03% after hours (read: How to Ride 33-Month High Euro With ETFs).

The ECB has now decided to cut the amount of bond purchases from 60 billion euros to 30 billion euros from the beginning of 2018. The ECB will reinvest the proceeds from maturing bonds to have the entire size of its QE program increasing.

Market Reaction

Since the euro dropped, currency-hedged Euro zone ETFs rose Oct 26. Apart from the ECB’s supportive downsizing, earnings reports were also upbeat. Several companies including Orange, Deutsche Bank (DE:DBKGn), Bayer (DE:BAYGN), ABB and Santander (MC:SAN) boosted the market with their earnings.

Added to this, the situation in Catalonia saw improvements as “Catalan President Carles Puidgemont decided against calling a snap election”, as per CNBC.com. iShares Currency Hedged MSCI Eurozone ETF HEZU gained about 1.3% on Oct 26.

Below we highlight a few ETF winners amid the ECB’s dovish downsizing, some upbeat earnings and signs of improvement in the Catalonia crisis.

iShares Currency Hedged MSCI Spain ETF HEWP – Up 1.9%

The fund looks to track the investment results of an index composed of large- and mid-capitalization Spanish equities while mitigating exposure to fluctuations between the value of the euro and the U.S. dollar. The fund yields 3.28% annually and charges 51 bps in fees.

WisdomTree Germany Hedged Equity ETF DXGE –Up 1.5%

The fund is designed to provide exposure to Germany equity markets while at the same time neutralizing exposure to fluctuations of the Euro movements relative to the U.S. dollar. The fund yields about 2.64% annually and charges 48 bps in fees (read: What Lies Ahead for German ETFs?).

WisdomTree Europe Hedged SmallCap Equity Fund EUSC – Up 0.94%

The fund looks to provide exposure to the European equity markets while at the same time neutralizing exposure to fluctuations of the Euro movements relative to the U.S. dollar. The fund yields 2.35% annually and charges 58 bps in fees (read: Do Europe ETFs Have More Upside?).

Deutsche X-trackers MSCI Eurozone High Dividend Yield Hedged Equity ETF HDEZ – Up 0.37%

The Xtrackers MSCI Eurozone High Dividend Yield Hedged Equity ETF looks to give investors exposure to high-quality international equities across the Eurozone, and provide an alternative, potentially reliable income stream on a currency-hedged basis. The fund yields 4.14% annually and charges 45 bps in fees.

iShares MSCI Germany Small-Cap ETF EWGS – Up 0.23%

The fund looks to track the performance of equities of small-cap companies whose market capitalization, as calculated by the index provider, represents the bottom 14% of the German securities market.

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