6 Sector ETFs Threatened By Brexit Uncertainty

With two days remaining to the Brexit decision, the entire world is busy in analyzing the outcome and its impact on the global financial market. While a ‘remain’ verdict of Britons will cause no upheaval in the market, a ‘leave’ outcome may lead the global market into a tailspin.

Though polls at the start of this week showed weaker chances of Britain exiting the European Union (EU), the margin of lead for ‘Remain’ is pretty thin by only about three percentage point. The direction of polls may change any time, thus continuing to unnerve investors (read: Safe Haven ETFs Surge on Brexit Fears).

In fact, several U.S. companies will bear the brunt of a Brexit (if at all it happens). As per FactSet, the U.S. makes up 68.8% of the S&P 500 revenues, followed by China responsible for 4.9%, and then the U.K. with 2.9% weight.

Though the U.K. exposure is not great in the U.S., there are a few stocks and ETFs that will come under pressure if Britain parts from the European Union. Investors should note that U.S. companies doing considerable business with Britain will be hurt by the falling pound which will cut U.S. earnings on repatriating the income.

Plus, a likely lower demand from the U.K. may weigh on foreign companies’ earnings. Also, a lot of global ETFs having substantial exposure in the U.K. will be marred if the ‘leave’ camp gains momentum by any chance. Let’s find out those high-tension sector ETFs.

Finance

U.S. banks’ operations are highly dependent on Britain as the latter provides easy access to the European Union. As soon as Britain cuts the cord with the EU, its importance as a corporate transit to the rest of the Europe would be lost, going by an article in CNBC. Many global institutions may even want to shift their base from London to the German capital Frankfurt – another hot spot in the European Union.

As per Keefe, Bruyette & Woods, earnings of large U.S. banks could be down by as much as 5.6% this year and as much as 9% next year if Britain exits the EU. Morgan Stanley (NYSE:MS), Goldman and J.P. Morgan would be at the highest risk while Wells Fargo (NYSE:WFC) would be relatively better off.

The big U.S. banks will experience a rise in expenses and feeble capital market if the ‘Leave’ camp wins. In any case, banking earnings have come under pressure owing to global growth issues (read: What is Bothering Global Financial ETFs?).

All these have put iShares U.S. Financial Services ETF IYG, PowerShares KBW Bank (KBWB), Financial Select Sector SPDR XLF, U.S. Broker-Dealers Index Fund (WA:IAI) and iShares MSCI Europe Financials ETF EUFN in danger.

Energy

Several energy ETFs are made up of stocks that are either headquartered in the U.K. or share strong business relation with Britain. Such companies are Apache (NYSE:APA) which operates pipelines and facilities in the UK and BP (LON:BP) Plc which is based in the U.K. While Apache finds place energy ETFs like VanEck Vectors Unconventional Oil & Gas ETF FRAK and First Trust ISE-Revere Natural Gas Index Fund (AX:FCG) with 5–6% weight, BP Plc puts SPDR S&P International Energy Sector ETF IPW in focus. The U.K. accounts for over 30% of the fund (read: BP Surprise Earnings Beat Boosts Global Energy ETFs).

Not only this, energy MLP ETF VanEck Vectors High Income MLP ETF YMLPalso has substantial weight in the fund.

Auto

Big auto companies will also feel the pinch as their business thrives on demand in the U.K. For example, Ford Motor (NYSE:F) had about 14.3% market share in Britain in 2015, almost similar to its U.S. exposure (14.7%). This is the reason why auto ETFFirst Trust NASDAQ Global Auto Index Fund CARZ may be hit hard if a Brexit happens.CARZ invests about 8.2% in Ford Motor (read: Auto Sales Plunge in May: ETFs & Stocks in Focus).

Technology

According to Bloomberg and J.P. Morgan, eBay generates a huge amount of revenues from Britain. In 2015, the company grabbed about 16.3% sales from U.K. This piece of information puts PowerShares NASDAQ Internet Portfolio ETF PNQI and First Trust Dow Jones Internet Index Fund FDN. If this was not enough, as per FactSet, the U.K. is responsible for about 4% of U.S. IT revenue.

Consumer Staples

As per Factset, the overall consumer staples sector has a meager exposure of 2.6%, but investors should note that Wall Mart has over 600 properties in United Kingdom. Only the U.S., Mexico and Central America were ahead of the United Kingdom. This solid exposure puts ETFs heavy on Wall Mart at risk. These ETFs are iShares Edge MSCI Multifactor Consumer Staples ETF CNSF andConsumer Staples Select Sector SPDR Fund XLP.

Material

In this section, we would like to highlight that Newmont Mining (NYSE:NEM) Corpis heavily reliant on U.K., generating over 60% of its revenues from that country. This invariably brings Newmont-rich ETFs like iShares MSCI Global Gold Miners ETF (NYSE:GDX) RING and PowerShares Global Gold and Precious Metals Portfolio ETF PSAU in focus.