U.K. ETFs In Focus As Total Employment Drops

The number of people in work in the U.K. decreased 56,000 in the three months to October, as people gave up searching for work, per the Office for National Statistics. This was above economists’ forecasts of a 40,000 drop for the period.

The jobless rate decreased to 4.3% in the same period, a 42-year low. However, this was primarily because of people leaving the labor force. The unemployment rate increased to 4.4% in October from 4.2% in September.

Economic Scenario

In the third quarter, U.K.’s GDP grew 0.4% sequentially and 1.5% year over year. Although this reflects a slight increase from 0.3% growth sequentially in the second quarter, the rate of improvement has been dismal since Brexit, and lags the overall Euro zone (read: U.K. ETFs in Focus on Lower GDP Growth Forecasts).

U.K. consumer price index increased 3.1% year over year in November, a near six-year high compared with 3.0% in October, per data released by the Office for National Statistics. Earlier in November, Bank of England (BOE) hiked its benchmark interest rate by 25 basis points to 0.5%. Despite relatively weak growth, this is the first time since July 2007 that the central bank has hiked the interest rate in order to curb inflation.

The British economy has been suffering since the Brexit referendum, as a falling sterling has made imports costlier. Moreover, wages in the United Kingdom are not increasing as fast as inflation. Basic wages grew 2.3% and pay including bonuses increased 2.5% in the three months to October, as a result of which consumers are witnessing a rise in costs in real terms.

Brexit

In a latest victory for Theresa May, Britain and the European Union struck a divorce deal last week, paving way for future talks on trade agreements and an orderly Brexit. “The most difficult challenge is still ahead,” European Council president Donald Tusk cautioned. “We all know that breaking up is hard. But breaking up and building a new relationship is much harder.”

However, in a recent development, Brexit talks might become difficult for the 61-year-old May who herself voted to remain in the EU in the Brexit referendum. British lawmakers gave the Parliament the final say over any exit agreement the government reaches with the EU. The House of Commons voted 309-305 to give lawmakers a veto on the terms of Brexit. This has introduced new uncertainty in May’s plans to go ahead with an orderly Brexit.

Let us now discuss a few currency hedged ETFs providing exposure to the United Kingdom (see all European Equity ETFs here).

iShares Currency Hedged MSCI United Kingdom ETF HEWU

For those looking to gain exposure to the British markets in particular, this fund is one of the most popular pure play options available. It seeks to maintain equity exposure to its un-hedged version EWU, while hedging away currency fluctuations between the dollar and the British pound.

The fund has AUM of $18.1 million and charges 49 basis points in fees per year. Financials, Consumer Staples and Energy are the top three sectors of this fund with 21.9%, 17.9% and 15.7% allocation, respectively (as of Dec 12, 2017). The top three holdings of EWU are HSBC Holdings (LON:HSBA) PLC, British American Tobacco (LON:BATS) PLC and Royal Dutch Shell (LON:RDSa) PLC, with 7.8%, 5.9% and 5.6% allocation, respectively (as of Dec 12, 2017). It has returned 7.0% year to date and 7.5% in a year (as of Dec 13, 2017). HEWU has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

WisdomTree United Kingdom Hedged Equity Fund DXPS

This fund seeks to provide exposure to the U.K. dividend-paying companies with an export tilt, while also hedging the currency risk.

The fund has AUM of $14.6 million and charges 48 basis points in fees per year. Consumer Staples, Energy and Financials are the top three sectors of this fund with 18.1%, 17.5% and 14.5% allocation, respectively (as of Dec 13, 2017). The top three holdings of the fund are Royal Dutch Shell PLC Class A, Royal Dutch Shell PLC Class B and BP (LON:BP) PLC with 5.9%, 5.8% and 5.6% allocation, respectively (as of Dec 13, 2017). It has returned 3.6% year to date and 4.2% in a year (as of Dec 13, 2017). DXPS has a Zacks ETF Rank #3 with a Medium risk outlook.

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