European Investors Buy Small Cap ETF on Rate Cut Hopes

Investors have poured more than $350 million into BlackRock Inc.’s Europe small cap ETF after European Central Bank (ECB) president Christine Lagarde hinted at a first rate cut in the summer.

According to data from ETFbook, the iShares STOXX Europe Small 200 UCITS ETF (EXSE) saw $357 million inflows this month, as of March 21. EXSE tracks the STOXX Europe Small 200 index which offers exposure to the 200 smallest companies in the STOXX Europe 600.

BlackRock's U.S.-issued European small cap ETF, the $116 million iShares MSCI Europe Small-Cap ETF (IEUS), has had outflows of $8.2 million so far this year through March 29. 

The inflows come after the ECB held interest rates at its March meeting, however, the policymaker cut eurozone inflation projections and growth forecasts, leaving the door open to a potential cut later in the year.

“We are making good progress towards our inflation target and we are confident of a result,” Lagarde said. “We clearly need more evidence and more data. We will know a little more in April but…a lot more in June.”

European Small Cap ETFs

Carsten Breski, global head of macro at ING, predicted the first rate cut will be in June.

“The worsening of the eurozone’s economic outlook and further fading away of (headline) inflationary pressures would argue for rather imminent smaller rate cuts to bring some relief,” he said.

“As much as the central bank hastily and sharply hiked rates on the way up, we think it will be cautious and gradual on the way back down.”

In response, European equities have rallied, with notable outperformance from risk-on parts of the market including small-cap value, banks, retail sector and Spanish equities.

The SPDR MSCI Europe Small Cap Value Weighted UCITS ETF (ZPRX), for example, which offers exposure to small-caps with lower valuations based on sales, book value and earnings, is up 10.3% over the past month, as at 27 March.

Commenting on European small caps, Björn Jesch, global CIO at DWS, said: "With each passing day, the number of investors seeking to protect themselves against the dangers of this level of concentration is likely to increase.

"For over a year now, earnings estimates for small caps have been continuously revised upwards, while those for blue chips have at best moved sideways. Earnings growth of well over 10% is expected in 2025.

"Measured in terms of relative earnings growth, a considerable gap has opened up between the performance of blue chips and small caps."

The SPDR MSCI Europe Small Cap Value Weighted UCITS ETF (ZPRX), for example, which offers exposure to small-caps with lower valuations based on sales, book value and earnings, is up 10.3% over the past month, as at 27 March.

Elsewhere, more defensive plays including the SPDR MSCI Europe Health Care UCITS ETF (HLTH) and the Amundi Index Euro Corporate SRI 0-3 Y UCITS ETF (ECR3) saw outflows of $262 million and $221 million, respectively, highlighting the bullish sentiment in the region.

Note: This article originally appeared in etf.com's sister publication etfstream at Investors pile into Europe small cap ETF on ECB rate cut forecasts.