Europe ETFs Sag Despite Second ECB Rate Cut of 2024

EZU dipped in the immediate aftermath of the rate cut.

The iShares MSCI Eurozone ETF (EZU) was down slightly after the European Central Bank cut interest rates on Thursday.

The ETF, which has $7.6 billion in assets under management, fell by 0.28%, shrinking its year-to-date return to 7.2%.

The ECB cut its key deposit rate by 25 basis points to 3.5%, as was widely expected. It was the second rate cut of the year from the European Central Bank.

“We shall remain data-dependent,” ECB President Christine Lagarde said after the decision. “That is particularly justified in view of the uncertainty that abounds” and “a declining path is not pre-determined… neither in terms of sequence, not in terms of volume,” she said.

After nearly two years of fighting inflation, the ECB has increasingly focused on reinvigorating economic growth in European Union countries.

GDP may grow by just 0.8% this year, according to the central bank’s latest forecast, while inflation fell to just 2.2% in August.

European ETFs haven’t been particularly strong performers over the past decade. They’ve underperformed their U.S. counterparts over most timeframes, including this year.

SPY Outshines EZU

The SPDR S&P 500 ETF Trust (SPY) has returned 1000 basis points more than EZU year-to-date. 

Perhaps continued ECB rate cuts can help boost the eurozone economy, lending support to the stocks of the region.

Market-based indicators suggest that there will be 36 basis points of more cuts this year, according to Bloomberg. That would put the ECB’s key deposit rate close to 3%.

Valuations in Europe are relatively low. Stocks in the index tracked by EZU, the MSCI EMU Index, are trading at a forward P/E of 12.7, below the 10-year average of 14.

That compares to a P/E of 21 for the S&P 500, which is above the 10-year average of 18.2x.

However, low valuations are no guarantee that fortunes will turn around for eurozone stocks.