NEW YORK (TheStreet) -- The European Central Bank has unleashed its own version of bond buying (or quantitative easing, QE) that was used in the U.S. and is now being used in Japan to increase the flow of capital through the economy. The ECB will buy up to €60 billion a month ($69 billion) from March 2015 to September 2016.
If there's anything we've learned from our very own domestic QE, it's that QE matters to stocks.
Which ETFs stand to benefit the most? Which eurozone QE traps should be avoided (when it's too obvious, it's obviously wrong)?
How to Find the Best Europe ETF
There are five major Europe ETFs:
1. Vanguard FTSE Europe ETF (VGK - Get Report)
2. iShares MSCI EMU ETF (EZU - Get Report)
3. WisdomTree Europe Hedged Equity ETF (HEDJ - Get Report)
4. SPDR Euro STOXX 50 ETF (FEZ - Get Report)
5. iShares Europe ETF (IEV - Get Report)
Here is what differentiates those five ETFs:
The Vanguard FTSE Europe ETF and the iShares Europe ETF have a 15% exposure to Switzerland. The remaining three ETFs have virtually none. The Vanguard FTSE Europe ETF is the largest and cheapest (expense ratio: 0.12%) Europe ETF, with exposure to Swiss stocks. Swiss stocks lost 15% following the Swiss National Bank's decision to stop artificially depressing the franc. A strong franc makes Swiss export goods more expensive and is a drag on the economy. Nevertheless, after dropping 15%, Swiss stocks may be due for a bounce.
The SPDR Euro STOXX 50 ETF is the most heavily traded and second most reasonably priced (expense ratio: 0.29%) Europe ETF. It has no exposure to Swiss stocks.
The WisdomTree Europe Hedge Fund ETF is designed to provide exposure to European equities, while at the same time neutralizing currency fluctuation.
When the euro is weak, the WisdomTree Europe Hedge Fund ETF will beat an un-hedged European equity fund, but when the euro is strong, it will under perform as an un-hedged European equity fund. This will probably limit gains (or enhance losses). (More details in the 'euro section' of this article.)
A blend of both the Vanguard and SPDR ETFs may be the most balanced way to gain exposure to European stocks. But beware that both ETFs are nearing technical overhead resistance and the odds for another leg down for U.S. stocks are above average (more details here: Smart Fed Fund Money Projects New S&P 500 Lows). It may be prudent to only buy on dips.
Beware of The QE 'Alibi Trade'
The purpose of QE is to curb deflation and spur inflation. Inflation erodes the value of a currency. According to conventional wisdom, the euro should decline.
But conventional wisdom is not always correct. Contrary to popular belief, domestic QE did not sink the U.S. dollar (U.S. dollar/QE chart).
Trap Alert! The euro is already down 18% since May 2014 . The chart below shows that down side appears limited. Going short the euro (or buying the dollar) right now is like picking up pennies in front of a train. It's just not worth the risk.
Save Heaven: Gold?
When the Federal Reserve launched QE1 in 2008, gold started to soar and eventually reached $1,900 an ounce.
Will eurozone QE have the same effect on gold?
Gold is already 14% into the rally. Buying gold now bears more risk than buying when it hit its recent low in late 2013, but more upside is still likely. The SPDR Gold Shares (GLD - Get Report) and iShares Gold Trust (IAU - Get Report) are easy ways to own gold.
Poor Man's Save Haven: Silver
The iShares Silver Trust just surpassed important technical resistance. This resistance is now support, and as long as it holds, the iShares Silver Trust should continue to move higher. Keep in mind that silver tends to be more volatile and move faster than gold.
The 'Cream of the Crop' Europe Trade
One can't talk about investing in Europe without mentioning Germany. Germany's DAX is the only European exchange at convincing all time highs.
There are a number of Germany ETFs, but none of them tracks the DAX well.
The iShares MSCI Germany ETF (EWG - Get Report) , the biggest and most popular Germany ETF, owns 59 stocks and claims targeted access to 85% of the German stock market. It has a correlation of only 0.59, and is trading 25% below its all time high, while the DAX is at an all-time high.
The DAX is currently trading 3% above support at 10,000. Further gains are possible (as long is the DAX stays above 10,000), but watch out if the DAX falls below 10,000.