Euro ETFs in Focus After Surprise ECB Rate Cut - ETF News And Commentary
11 Novembre 2013 - 2:01PM
Zacks
The European Central Bank (ECB) surprised the global market on
Thursday with its decision to cut its interest rates. The bank
slashed its benchmark interest rate by a quarter percentage point
to a record low 0.25% in order to support Euro zone growth.
Marginal lending rate was also reduced to 0.75% from 1% while
deposit facility rate remains unchanged.
Behind the Rate Cut
Though the Euro zone emerged from an 18-month recession in the
second quarter with 0.3% expansion, the recovery still seems
fragile. Tumbling inflation and higher unemployment might stall the
burgeoning Euro zone economic recovery.
Inflation fell from 1.1% in September to a record low of 0.7% in
October. The number is also well below the ECB inflation target of
under 2%. Unemployment across the Euro zone remained at the record
high of 12.2% in September (read: Europe ETF investing 101).
The European Commission (EU) expects unemployment in this
17-country bloc to remain near the record high until 2015 while
inflation would be at lower levels of 1.5% this year and could
further drop to 1.4% in 2015. This suggests that the Euro zone
might experience a prolonged period of low inflation.
Thanks to weak private demand and investment, the agency sees the
economy shrinking 0.4% this year, and slashed its economic growth
outlook from 1.2% to 1.1% for the next year.
Euro Zone Grows Slow
Still, various data points suggest that the Euro zone is gaining
momentum albeit at a slower pace despite low inflation and elevated
unemployment (read: 3 European ETFs Leading the Recovery).
Economic and business confidence is rising in the 17-country bloc,
indicating a new era of growth for the continent. In fact, the
confidence indicator continued to rise in October for the sixth
time with growth of 0.9%.
Further, Euro zone manufacturing activity accelerated in October
for the fourth consecutive month to 51.3 from 51.1 in September.
Germany, Ireland and Spain recorded robust growth while France and
Greece failed to expand.
In an effort to support the Euro zone’s revival, the ECB President
– Mario Draghi – is committed to provide ample liquidity to banks
when needed until at least July 2015.
Market Impact
The surprise move by ECB led to a sharp sell-off of the euro
against the U.S. dollar. The euro fell 0.8% against the greenback
on Thursday at the close after slipping as much as 1.6% on the day,
which marks the biggest drop in two years.
This poor performance was also felt in the ETF world, with euro
currency ETFs falling in intraday trade. This downward trend is
expected to continue only for a few days if history is any guide.
The euro was down nearly 3% over the past 10 days but is up 1.6% so
far this year.
So investors could definitely take advantage of the current
pullback and consider the following two ETFs for their exposure if
you believe that the worst is over for the euro (see: all the
Currency ETFs here):
How to Play?
CurrencyShares Euro Trust (FXE)
This fund is a great way to play a rise in the euro relative to the
U.S. dollar. It tracks the movement of the euro relative to the
USD, net of the Trust expenses, which are expected to be paid from
the interest earned on the deposited euros.
The ETF has amassed $201.7 million in its asset base and sees a
good volume of more than 420,000 shares a day. The product has an
expense ratio of 0.40%. FXE generated returns of nearly 2% in the
year-to-date time frame while it has lost 2.79% in the past 10
trading sessions (read: Play a Resurgent Europe with These
ETFs).
iPath EUR/USD Exchange Rate ETN (ERO)
This fund seeks to match the performance and yield of the EUR/USD
exchange rate before fees and expenses. The fund holds 100% of its
assets in EUR. The product not only provides a core investment
opportunity in the currency space but also enables investors
holding a well-diversified portfolio, to hedge their position
against foreign exchange fluctuation.
Still, ERO has failed to attract investors with just $5.8 million
in AUM and less than 1,300 shares in average daily volume. This
suggests that investors have to pay an additional cost in the form
of wide bid/ask spread beyond the expense ratio of 0.40%. The note
was down 0.23% in the last 10 days while it has added 0.67% in the
year-to-date period.
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IPATH-EUR/US EX (ERO): ETF Research Reports
CRYSHS-EURO TR (FXE): ETF Research Reports
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