U.K. ETFs In Focus As Inflation Drops

Inflation in the UK dropped for the first time in six months in December, indicating that the post-Brexit hit on consumer spending might finally be easing.

Into the Headlines

U.K. consumer price index increased 3.0% year over year in December compared with 3.1% in the prior month, per the Office for National Statistics (ONS). Moreover, core inflation, which excludes volatile items such as food and fuel costs, increased 2.5% in December compared with 2.7% in the prior month.

The primary factors responsible for the decline in consumer prices were a slower growth in air fares in December and a decrease in prices of toys and games. However, ONS added that the slowing growth in these factors was partially offset by increased duties on tobacco products and rising fuel prices.

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.

Despite relatively weak growth, Bank of England (BOE) hiked its benchmark interest rate by 25 basis points to 0.5% in November, to curb inflation. BOE expected inflation to peak in the final months of December, so this fall is a positive for the policymakers in the central bank, as they look to tackle the impact of rising inflation on consumer spending. However, ONS officials think it is still too early to say if this reduction in consumer prices is a one-off case or the start of a falling trend in inflation.

Brexit

Earlier in 2017, Britain and the European Union struck a divorce deal, paving way for future talks on trade agreements and an orderly Brexit.

British MPs are due to vote on the EU withdrawal bill on Jan 17. Although it is expected to be passed in the House of Commons, it will then move to the pro-EU upper House of Lords for further scrutiny. Pro-EU Conservative MP Ken Clarke said that he hoped Lords will make enormous changes to the bill, as the parliament has the final say on the bill and can implement massive changes to it (read: U.K. ETFs in Focus as Total Employment Drops).

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 $18.4 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%, 17.6% and 16.4% allocation, respectively (as of Jan 12, 2018). The top three holdings of EWU are HSBC Holdings (LON:HSBA) PLC, Royal Dutch Shell (LON:RDSa) PLC and British American Tobacco (LON:BATS) PLC, with 7.9%, 5.8% and 5.7% allocation, respectively (as of Jan 12, 2018). It has returned 6.4% in a year. 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 $13.9 million and charges 48 basis points in fee per year. Energy, Consumer Staples and Financials are the top three sectors of this fund with 17.7%, 17.3% and 14.5% allocation, respectively (as of Jan 16, 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 6.1%, 5.9% and 5.5% allocation, respectively (as of Jan 16, 2017). It has returned 5.3% in a year. DXPS has a Zacks ETF Rank #3 with a Medium risk outlook.

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