Small Cap European ETFs Could Shine In Q4

September 04, 2014

The euro has been declining against the dollar in recent weeks, hitting a one-year low on Tuesday at $1.3110, but the impending announcement from the European Central Bank later today could boost the euroa amid mounting pressure for it to stimulate the Eurozone economy and get inflation back to its target level.

Whether the ECB will launch a new program to stimulate the Eurozone economy is unclear, but Draghi has proven his mettle in taking bold measures already this year with negative deposit rates in June. However, stimulus in the private sector could help boost the economy and there are several exchange traded funds that could give you exposure to this in the last few months of the year.

Viktor Nossek, head of research at Boost ETP, argues that Q4 could see the ECB providing some aggressive action at some point in the next few months. Asset backed securities include mortgage-backed loans, small business loans and so on.

The ECB  will look to buy simple structures and what the ECB has said is that it is endorsing simple physical based ABS that do not embed complex synthetic structures, explains Nossek. “Simple asset backed securities endorsed by the ECB should see institutional investors eventually step in to buy into troubled markets including Italy, Greece, Portugal and Spain.

The ECB is likely to look to revive this market in an attempt to provide relief. It is thought that it will stimulate the sector, which in turn will stimulate employment. This, combined with the recent introduction of the targeted longer-term refinancing operations (TLTRO) program in June, could help boost the flailing Eurozone economy.

“There is some expectation around the ECB to provide extra stimulus because of the fear that current disinflation will feed through into future deflation, incentivising households and businesses to postpone spending and further undermine the recovery from domestic demand the Eurozone so desperately needs.  It is likely to be the case that the next QE impetus will see buying asset backed securities (ABS), including those whose underlyings comprise pooled loans of small businesses, the very sector which has been cut off from obtaining affordable bank credit for too long and which the ECB is looking to target stimulus in particular,” he said.

In a nutshell, the difference with this TLTRO program and past programs is that there are conditions attached to the loans from the ECB. Banks can’t just borrow money and then repay it at 1 percent over 3 years (i.e. the LTROs), because there are now stipulations on how it must be spent.

Exchange traded fund investors will likely be able to benefit from this as a result the asset allocation impact ETFs.

Nossek said: “European equity ETFs are likely to gain traction as will small cap European equities.”

ETFs that would cover this market include, among others,

-          The physically backed iShares STOXX Europe Small 200 (DE) UCITS ETF (EXSE), which costs 0.20 percent.

-          The swap-backed ComStage MSCI Europe Small Cap ETF, which costs 0.35 percent per year.

-          The physically backed SPDR MSCI Europe Small Cap ETF costs 0.40 percent.





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