U.K. ETFs In Focus As GDP Growth Slows

The Office for National Statistics lowered UK’s GDP growth estimate for Q4 2017 in its second estimate, bringing 2017 GDP growth to a 5-year low. Low spending weighed on GDP growth, as UK prepares to leave the EU with growth lagging major developed economies.

The Forties pipeline closure for most of December also brought UK GDP down as energy production declined.

Into the Headlines

GDP grew 0.4% in the October-December quarter, down from the initial estimate of 0.5%. Owing to the revision, GDP growth for 2017 came down to 1.4% compared with the earlier estimate of 1.5%. This made the UK the slowest growing nation in the G7 in 2017.

Household spending grew a mere 0.3% in the fourth quarter and 1.8% in 2017, the slowest annual growth in five years. This was primarily due to increasing price pressure. U.K. consumer price index increased 3% year over year in January, same as the previous month, per the Office for National Statistics (ONS). However, it still remains way above the Bank of England’s 2% target.

Moreover, the unemployment rate increased to 4.4% in the three months to December compared with 4.3% in the previous period. Adding to the agony, average weekly earnings grew 2.5% in the three months to December, unchanged from the reading for the three months to November.

Despite relatively weak fundamentals, Bank of England (BOE) hiked its benchmark interest rate by 25 basis points to 0.5% in November to curb inflation. “Domestic inflationary pressures are beginning to firm, but they are firming from quite a low level. So the task for MPC, as those imported inflationary pressures come off, is to bring inflation back to [the Bank’s 2pc] target in reasonable horizon,” Mark Carney of the Bank of England said, hinting at further rate hikes to curb inflation.

Brexit

In 2017, Britain and the European Union struck a divorce deal, involving talks on trade agreements and an orderly Brexit. Brexit woes have been weighing on UK’s economic fundamentals since the day the bill was passed in 2016, leading to a slump in the pound and weighing on consumer spending.

In a latest development, Theresa May asked the EU to consider a longer transition period extending to 2020. Although the talks are in early stages, May received a lot of backlash from pro-Brexit politicians. Gerard Batten, an UKIP MEP and the party's interim leader, said “This is Brexit betrayal at its contemptible worst. It’s time for May to go and for a genuine Brexiteer to step up for role of Prime Minister. “

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 $13.9 million and charges 49 basis points in fee per year. Financials, Consumer Staples and Energy are the top three sectors of this fund with 22.7%, 16.8% and 15.1% allocation, respectively (as of Feb 21, 2018). 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 8.0%, 5.4% and 5.4% allocation, respectively (as of Feb 21, 2018). It has returned 3.1% in a year but lost 4.8% year to date. 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 U.K. dividend-paying companies with an export tilt, while also hedging the currency risk.

The fund has AUM of $13.0 million and charges 48 basis points in fee per year. Energy, Consumer Staples and Financials are the top three sectors of this fund with 16.9%, 16.8% and 15.1% allocation, respectively (as of Feb 22, 2018). The top three holdings of the fund are Royal Dutch Shell PLC Class A, Royal Dutch Shell PLC Class B and Rio Tinto (LON:RIO) PLC with 5.7%, 5.6% and 5.4% allocation, respectively (as of Feb 22, 2018). It has returned 2.3% in a year but lost 5.2% year to date. DXPS has a Zacks ETF Rank #3 with a Medium risk outlook.

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