The ETF Tailwind of ECB QE

By far, the biggest market-moving event this week was the European Central Bank’s (ECB) decision to implement the Old World version of quantitative easing (QE). Although most everyone suspected the ECB would begin its own bond-buying program, the very bullish tailwind for both domestic and international exchange-traded funds (ETFs) was caused by the unexpected size and scope of the QE.

The ECB now has committed to buying 60 billion euros’ worth of bonds per month for 18 months, much larger than the estimate for 50 billion euros per month for 12 months.

More importantly, it’s the aggregate size of the ECB’s balance sheet that’s created the strong tailwind, as the new balance sheet will be more than 1.2 trillion euro QE by September 2015. That is far larger than the previously stated 1 trillion euro target.

A quick look at the charts of the following ETFs — the PowerShares DB US Dollar Bullish ETF (UUP), the SPDR S&P 500 ETF (SPY) and the Vanguard Total World Stock ETF (VT) — reflects the bullish reaction to the ECB’s QE pronouncement.

Interestingly, the rising U.S. dollar seen here via UUP is something that has the potential to weigh down U.S. equities in SPY, but we have yet to see this outcome reflected in the price of SPY.

Perhaps more important are the potential near- and medium-term gains in international equities of the sort found in VT. This fund now is back above both its 50- and 200-day moving averages, a bullish technical sign that we are watching extremely closely as a trigger point for new allocations to international equities.

While it remains to be seen whether the ECB’s QE program will help the European Union’s real economy, one thing that is clear is that QE props up nominal stock prices — and that is the kind of ETF tailwind smart investors need to ride.