Inflation Ticks Up: What's In Store For Europe ETFs?

The Eurozone was a strong performer in 2017, courtesy of strong economic growth and fundamentals. However, the global market selloff and trade war fears weighed on the performance of the 19-nation bloc in the first quarter of 2018.

Although consumer prices picked up in March, it is still far from the European Central Bank's (ECB) 2% target. However, as inflation is at a 3-month high, policymakers expect it to edge closer to 2%.

Into The Headlines

According to Eurostat, consumer prices in the euro area increased to 1.4% in March from 1.1% in February but in line with a Bloomberg survey's expectations.  However, core inflation, which excludes volatile items like food and fuel, remained unchanged at 1%.

Consumer goods had the greatest impact on inflation, with food, alcohol and tobacco prices increasing 2.2% year over year compared with 1.0% in February. The services sector grew 1.5% year over year in March compared with 1.3% in the prior month while energy prices rose 2% compared with 2.1% in February.

Economic Scenario

The 19-member Euro bloc reported low unemployment rates, a sign of strength in economic fundamentals of the Euro area. A separate Eurostat report showed a drop in seasonally adjusted unemployment rate to 8.5% in February from 8.6% in the prior month, reflecting a more than 10-year low. This might lead to a rally in prices as manufacturers pass the cost of rising wage bills to consumers.

As a result, economists expect the Euroarea to maintain strong fundamentals in 2018. To get inflation back to the target mark, the ECB reduced its main interest rate to zero and initiated bond purchases to inject more money into the economy. However, with relatively strong fundamentals, people backing an end to ECB's asset purchase program might ask for the winding down of the QE program. This has introduced the possibility of an interest rate hike by mid-2019.

Moreover, in case the Federal Reserve hikes interest rates faster than expected, it might lead to the strengthening of the greenback against the euro, a positive for export-dependent Europe.

Let us now discuss a few ETFs that are primarily focused on providing exposure to European equities.

iShares MSCI Eurozone ETF EZU

This ETF is a play on developed European economies using the common currency with a focus on large and mid-cap equities.

It has AUM of $14.0 billion and charges 49 basis points in fees per year. The fund has a 32.9% allocation to France, 29.2% to Germany and 11.1% to Netherlands. From a sector look, Financials, Industrials and Consumer Discretionary are the top allocations of the fund, with 20.2%, 14.8% and 14.2% exposure, respectively. It has lost 0.4% year to date but has returned 17.4% in a year.

SPDR Euro Stoxx 50 ETF FEZ

This fund is appropriate for investors looking to gain diversified exposure to equities of the Eurozone.

It has AUM of $4.3 billion and charges 29 basis points in fees per year. From a geographical perspective, the fund has top allocations to France, Germany and Spain, with 36.9%, 32.4% and 10.7% exposure, respectively. From a sector look, Financials, Industrials and Consumer Discretionary are the top allocations of the fund, with 21.9%, 13.6% and 12.3% exposure, respectively. The fund has lost 1.0% year to date but has returned 13.9% in a year.

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