U.K. ETFs In The Spotlight As Inflation Ticks Down

The Office for National Statistics (ONS) reported that consumer prices in the United Kingdom slipped to the lowest in a year while wages ticked up. Latest data show that the squeeze on U.K. households may be coming to an end, driving chances of a rate hike as early as next month.

Into the Headlines

Consumer prices slowed to 2.5% in March compared with 2.7% in the prior month. Economists expected inflation to remain unchanged in the month. Although inflation has been on a downtrend lately owing to the fading impact of the Brexit referendum on the pound, it might make a comeback as economic growth across the globe picks up.

ONS stated that a slow rise in the prices of women’s clothing as well as alcohol and tobacco led to the slowdown in inflation. However, wages grew 2.8% in February, above the inflation reading.

GDP grew 0.4% in the October-December quarter, down from the initial estimate of 0.5%. Moreover, severe weather conditions in the U.K. might have led to a further slowdown in GDP in the first quarter of 2018. However, economists are still of the view that the Bank of England will proceed with its rate hike in May.

“Today’s data is unlikely to cause the Bank of England to shy away from a rate rise next month. But with economic growth expected to come in weaker in Q1 owing to the snowy weather, and the need for further evidence of rising wage pressures, it will be a less clear-cut affair than anticipated,” per an Independent article citing Tej Parikh of the Institute of Directors.

Global Risks to the Economy

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 the U.K.’s economic fundamentals since the day the bill was passed in 2016, leading to a slump in the pound and drop in consumer spending.

Theresa May has not been having an easy time with Brexit negotiations. In another embarrassing defeat, the Lords voted 348 to 225, a majority of 123, in favor of an amendment to May’s Brexit bill, requiring a report about what efforts ministers made to secure a customs union by October.

Adding to the woes, increasing tensions between Washington and Beijing related to trade have further clouded May’s plans on achieving free trade deals around the world after Britain’s exit from the EU.

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

iShares MSCI United Kingdom ETF EWU

For those looking to gain exposure to the British markets in particular, this fund is one of the most popular pure play options available.

The fund has AUM of $2.0 billion and charges 49 basis points in fee per year. Financials, Consumer Staples and Energy are the top three sectors of this fund with 22.2%, 16.5% and 16.1% allocation, respectively. The top three holdings are HSBC Holdings (LON:HSBA) PLC, Royal Dutch Shell (LON:RDSa) PLC and BP (LON:BP) Plc, with 7.2%, 5.8% and 5.3% allocation, respectively. It has returned 16.8% in a year and 1.9% year to date. EWU has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

First Trust United Kingdom AlphaDEX Fund FKU

This fund seeks to provide exposure to U.K. companies by utilizing the AlphaDex stock selection strategy.

The fund has AUM of $18.6 million and charges 80 basis points in fee per year. Consumer Discretionary, Industrials and Materials are the top three sectors of this fund with 28.3%, 17.8% and 16.2% allocation, respectively. The top three holdings of the fund are Ocado (LON:OCDO) Group Plc, Royal Mail (LON:RMG) Plc and GKN (LON:GKN) Plc with 3.0%, 2.8% and 2.6% allocation, respectively. It has returned 21.1% in a year and 5.3% year to date. FKU has a Zacks ETF Rank #3 with a Medium risk outlook.

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