The European Central Bank is contemplating a broad-based asset purchase program that could mirror the Federal Reserve’s quantitative easing, potentially fueling a rally in Europe exchange traded funds.
“The objective here would not be to defend the current stance, but rather to increase meaningfully the degree of monetary accommodation,” ECB president Mario Draghi said in a speech in Amsterdam, Bloomberg reports. “The Governing Council is committed –- unanimously –- to using both unconventional and conventional instruments to deal effectively with the risks of a too-prolonged period of low inflation.”
The ECB is considering an asset program to help help reverse a deflationary trend in the Eurozone market – inflation slowed to 0.5% last month, the weakest pace in over four years and below the ECB’s 2% target.
Additionally, the strengthening euro currency has been weighing on the recovery of the Eurozone economy.
“A rise in the exchange rate, all else being equal, implies a tightening of monetary conditions, a downward impact on inflation and potentially a threat to the ongoing recovery,” Draghi said. “If so, this would call for policy action to maintain the current accommodative stance.”
An aggressive asset purchasing program could support European stocks, similar to results seen in the U.S. after the Federal Reserve enacted its own QE program.
Investors can gain exposure to European stocks through popular ETFs like the Vanguard FTSE Europe ETF (NYSEArca: VGK) and iShares Europe ETF (NYSEArca: IEV). The two ETFs include broad European equity exposure, including non-Eurozone members U.K. and Switzerland, which diminish some of the risks associated with investing in the Eurozone. On the other hand, the SPDR EURO STOXX 50 Fund (NYSEArca: FEZ) excludes the U.K. and Switzerland in favor of a heavy tilt toward Eurozone countries, such as France, Germany, Italy and Spain. [Overweighting Equity ETFs, Foreign and Domestic]
Alternatively, if the ECB does decide to take a looser stance on monetary policies, the WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ) would benefit from a weakening euro currency and an expanding economy. HEDJ hedges against currency risks, negating the potential impact of a depreciating euro currency on the fund’s overall returns. [Different Approaches to Europe ETFs]
For more information on Europe, visit our Europe category.
Full disclosure: Tom Lydon’s clients own shares of HEDJ.