ECB Surprise Shakes Up Popular ETFs

ECB Surprise Shakes Up Popular ETFs

The central bank delivers less stimulus than hoped, sending some ETFs surging and others plunging.

sumit
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Senior ETF Analyst
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Reviewed by: Sumit Roy
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Edited by: Sumit Roy

Expectations were simply too high. That's the explanation analysts are giving for today's big market moves, including the surge in the euro currency and the plunge in eurozone stocks.

The European Central Bank cut its deposit rate 10 basis points to -0.3%, extended its QE program by six months to March 2017, and agreed to buy local and regional debt, but markets were unimpressed. In particular, some traders were hoping for monthly bond purchases to be expanded from the current rate of 60 billion euros per month.

But that didn't happen. Perhaps the ECB was held back by more hawkish members of the executive board. Or perhaps ECB President Mario Draghi wanted to keep some powder dry in case it's needed in the future.

Whatever the reason, markets were underwhelmed, and many of the crowded ECB-inspired trades of the past year were quickly unwound.

Euro ETF Surges

Perhaps the most popular of these was the short-euro/long-dollar trade.

From a low of 1.0524 today, the euro spiked as high as 1.0981 against the greenback. Likewise, the CurrencyShares Euro ETF (FXE | B-98) surged 3.2%, while the PowerShares DB US Dollar Index Bullish ETF (UUP | B-73) tanked 2.3%.

The thesis behind the short-euro trade was the divergence between the monetary policies of the Federal Reserve and the European Central Bank. With the ECB easing this month, only two weeks ahead of an anticipated interest-rate hike from the Fed, it was a no-brainer to short the euro, according to some.

At least today, that trade is experiencing a hiccup. The question is whether this is simply a blip in the larger downtrend in the euro (and an uptrend in the dollar) or a sustainable reversal. Certainly, the ECB and Fed policy remain very much divergent. Today's ECB decision, even if it was less aggressive than some had hoped, still leaves eurozone monetary policy extremely loose for at least the next 15 months.

If the Fed follows through with a December rate hike and continues to lift rates through 2016, that could put renewed pressure on the euro-dollar exchange rate.

HEDJ Tanks

Other casualties of today's ECB decision were European stocks. Unsurprisingly, when the central bank doesn't deliver the stimulus that many were betting on, traders become a bit more risk averse.

The DAX in Germany and the CAC 40 in France tumbled 3.6%, putting intense pressure on ETFs such as the currency-hedged WisdomTree Europe Hedged Equity ETF (HEDJ | B-49). HEDJ has been the most popular ETF so far this year, with nearly $15.5 billion in inflows through November.

Ironically, vanilla eurozone ETFs that aren't currency-hedged, like the iShares MSCI EMU ETF (EZU | A-83), are outperforming today, as the jump in the value of the euro offsets declines in stock prices. EZU only fell by 0.4% at the same time that HEDJ tanked 4.3%.

Longer term, the fate of ETFs like HEDJ and EZU will depend not on today's ECB action per se, but on whether the overall stimulus measures from the central bank turn out to be successful in boosting the eurozone economy.

Interest Rates Spike

Another trade that's being unwound today is long sovereign eurozone bonds. With the ECB purchasing fewer bonds than expected, prices are naturally selling off. In turn, interest rates (which move inversely to bond prices) are rocketing higher.

The German 10-year bond yield is up 20 basis points today to 0.67%. That's having a knock-on effect on the U.S. bond market as well. The U.S. 10-year yield gained 17 basis points to 2.35 percent, while the U.S. two-year yield added as much as 6 basis points to 0.99%, the highest level since May 2010.

While there are U.S.-listed exchange-traded products that hold eurozone sovereign debt such as the WisdomTree Euro Debt ETF (EU) and the DB German Bund Futures ETN (BUNL | C), none is popular.

However, there are quite a few popular funds tied to the Treasury market, such as the iShares 20+ Year Treasury Bond ETF (TLT | A-83) and the PIMCO 25+ Year Zero Coupon U.S. Treasury ETF (ZROZ | C-57). TLT and ZROZ are both getting hit hard today, losing 2.7% and 4.4%, respectively.


Contact Sumit Roy at [email protected].

Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.