Stock Market Today: How to Buy the ECB QE

By far the biggest event in the stock market today, not only for the Dow Jones Industrial Average and the S&P 500, but also for the currency, bond and international financial markets today, was the European Central Bank’s (ECB) move to issue even more “QE” than even the most optimistic bulls had anticipated.

In fact, “Super” Mario Draghi lived up to his moniker, juicing financial markets today with a much-bigger-than-expected bond buying program that exceeded estimates both in terms of scope, and size. The result was a near 260-point spike in the Dow Jones Industrial Average, which lead other financial markets today markedly higher in sympathy.

Let’s take a look at the details of the ECB QE, and you’ll see why they caused such a kerfuffle in the markets today.

Size: 60 billion euros per month for 18 months vs. (E) 50 billion for 12 months.

Yes, some are saying the 60 billion per month is a touch misleading because it includes previously announced ABS and CDO purchases, but I think this is missing the bigger point. You see, the ECB QE is really all about the aggregate size of the balance sheet.

The new ECB balance sheet will be over 1.2 trillion euro by September 2015, with room for more. That is far larger than the previously stated 1 trillion euro target—and that, my friends, was the eminent source of the bullishness in the stock market today.

Risk Sharing: The sovereign bond purchases will be “Pari-Passu.”

The ECB said sovereign bond purchases would be pari-passu (meaning all bond purchasers can will be regarded equally, and thus repaid at the same time), which is important because it won’t result in an offset of private market debt purchases. Despite not including total risk sharing across the ECB, and as such putting default risk on the balance sheet of the national central banks, the bottom line is that the chance of default (which is really all that matters here) on much of the QE debt remains very low, and will not be an inhibitor to the success of the program.

Unanimity of the Decision: All Parties Thus Concur

Whether the Germans were on board with the ECB QE was a topic of concern for the markets today. While there was no actual vote (so we can’t see who was for it or against it), Draghi said in the press conference that there was unanimity in using QE as a legal monetary policy tool. This strongly implies the Germans, while likely reluctant, will not try to derail the program.

I believe the stock market today reflects the bullish response to the ECB QE, not just here at home but particularly with respect to European equities. In fact, if you are looking to buy the ECB QE then I think the best way to do so is with an exchange-traded fund (ETF) such as the Wisdom Tree Europe Hedged Equity ETF (HEDJ).

This fund already is significantly outperforming the S&P 500 year to date (7% vs. 1%), and I suspect this can continue over the coming weeks and months.

Interestingly, I was surprised yesterday while watching the analysis/reaction to the ECB QE announcement, as some of it seemed to focus on the economic implications of the details of QE.
We don’t actually know if QE helps an economy, even after six years of it here in the United States. However, we are interested in stock market returns, and we do know pretty well that QE makes nominal stock prices go up (see UK stocks, Japan stocks and US stocks).

My initial bullish thesis on Europe was based on the proposition of an expanded balance sheet, and seeing as the ECB is committed to an even larger and open-ended balance sheet expansion than most had previously anticipated, I view this as even more European equities bullish.

From an investment standpoint, I continue to like HEDJ as the single best way to play “Europe” broadly, as it also protects you from a decline in the currency. And despite the falling currency, I still like country-specific and sector-specific ETFs such as the iShares MSCI Italy Capped (EWI), Global X FTSE Portugal 20 ETF (PGAL), and the iShares MSCI Europe Financials (EUFN).

While these respective ETFs are not protected from the drop in the euro (and it will weigh on returns for US investors) I believe the potential upside in these ETFs is more than enough to warrant taking on the currency risk. To use a crude analogy, HEDJ is like the S&P 500, while the remaining ETFs are like cyclicals sectors—and thus they will be more volatile than HEDJ in both a rising and falling tide.

Bottom line: For anyone other than those with a very short-term outlook, I think you can begin to leg in to HEDJ or the other positions. And, if you already own them, I think adding to them gradually on a schedule over the next week or two will prove prescient.