The European Central Bank unexpectedly cut rates in an attempt to bolster the Euzorone economy. However, investors dumped EU stocks and exchange traded funds Thursday, anticipating an extended period of weakness.
The SPDR EURO STOXX 50 ETF (NYSEArca: FEZ) declined 1.3% Thursday. FEZ is up 20.5% year-to-date.
ETFs linked to Germany, the Eurozone’s largest economy, also faltered. The iShares MSCI Germany ETF (NYSEArca: EWG) dropped 0.4% Thursday. EWG is up 20.6% year-to-date.
The ECB cut its benchmark rate to 0.25% from 0.5%, reports Namitha Jagadeesh for Bloomberg. Only three of 70 economists predicted a cut in a Bloomberg survey.
“We may experience a prolonged period of low inflation,” European Central Bank President Mario Draghi said. “Accordingly, our monetary policy stance will remain accommodative for as long as necessary.”
Investors, though, interpreted the action as a lack of confidence in the economy.
“We passed the initial euphoria to begin to think why the ECB chose to cut rates now when very few of us saw it coming,” Michael Woischneck, an equities manager at Lampe Asset Management, said in the article. “A prolonged period of low interest rates also means a prolonged period of very weak growth in the euro area. I do think Europe will recover, but it will take longer than expected.”
Lower interest rates help stimulate an economy, and the added liquidity weakens the euro currency against a basket of foreign currencies.
ETF investors who are still bullish on the European markets can take on currency hedged-equity plays. ETFs with foreign exposure typically hold domestic currency denominated stocks, so a depreciating foreign currency would mean the stocks are worth less U.S. dollars. Currency hedged equity ETFs typically outperform similar non-currency hedged equity funds when the underlying currency is weakening against the U.S. dollar.
With the WisdomTree Europe Hedged Equity Fund (HEDJ) and the db X-trackers MSCI Europe Hedged Equity Fund (DBEU), investors can gain exposure to Eurozone equities while hedging against the negative effects of a depreciating euro currency. Both ETFs are trading lower today with HEDJ down almost 0.6% on volume that is more than double the daily average. [WisdomTree Plans Currency Hedged International Dividend ETF Play]
Additionally, the db X-trackers MSCI Germany Hedged Equity Fund (DBGR) and WisdomTree Germany Hedged Equity Fund (DXGE) provide currency hedged equity exposure to German stocks.
SPDR EURO STOXX 50 ETF
For more information on Eurozone, visit our Europe category.
Max Chen contributed to this article.