Will Britain Leave Or Remain EU? ETFs In Focus On D-Day

All eyes are currently on the developments in the United Kingdom and its referendum on European Union membership today. Though chances of Britain remaining in the European Union (EU) have increased over the past week fueling a rally in the global stock markets, a series of latest polls still suggest a close battle between for and against the campaigns, resulting in uncertainty (read: Brexit Vote Approaches: Top Stock and ETF to Watch).

This is especially true as two recent polls – both conducted over the internet – put the Leave camp ahead by one or two points while a telephonic poll pointed to a lead of 48% for those willing to remain in EU versus 42% wanting to exit. Additionally, a poll by Survation for the newspaper The Mail on Sunday showed that 45% favored staying in EU while 44% wanted to leave. A YouGov/Sunday Times polls revealed 44% chances of Britain exiting the EU and 42% of staying. The final poll by ComRes for the Daily Mail and ITV (LON:ITV) News gave Remain a 6-point lead over Leave.

Likely Consequences

If Britain votes to leave the European bloc, it might be catastrophic for the British markets, at least in the short term. While it might help to promote long-term growth, the short-term pain could be quite severe and lead to worldwide economic instability and chaos in stock markets. In particular, it could threaten more than a trillion dollars in investment and trade with the United States, and result in a sharp decline in the British pound. As such, investors would rush to safe haven avenues and away from riskier assets.

And with Britain being a 10% revenue generator for 30 companies in the S&P 500 index, it shouldn’t be surprising if many American stocks are hit hard by this turmoil. In fact, the companies having large exposure to British banks or doing considerable business with Britain will be badly hammered by the falling pound which will reduce U.S. earnings on repatriating the income (read: 6 Sector ETFs Threatened by Brexit Uncertainty).

Nevertheless, a Remain vote would bring back peace and confidence in both the United Kingdom and the financial markets. Further, the focus would return to the Fed policy, growth in China and oil price.

ETFs in Focus on Brexit

We have profiled six ETFs that are in focus because of the Brexit vote:

iShares MSCI United Kingdom ETF EWU

The British ETF gained 6.3% over the past one-week after Brexit fears eased. The fund tracks the MSCI United Kingdom Index and is home to a small basket of 114 companies. It does a decent job of spreading assets, as a single stock in the basket makes up for less than 5.3% of the portfolio. From a sector look, financials is the top sector at 21%, closely followed by consumer staples (19.4%) and energy (13.1%). EWU is by far the most popular and liquid ETF in the European space with AUM of $2.1 billion and average daily volume of nearly 4.3 million shares. Expense ratio comes in at 0.48%. The product has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook.

iPath S&P 500 VIX Short-Term Futures ETN VXX

While volatility products have been terrible performers over the medium and long terms due to a contangoed market and a steep roll cost, they are intriguing picks during periods of turmoil or uncertainty. That being said, VXX has amassed $1.6 billion in AUM and trades in heavy average volume of 74.8 million shares a day. It charges 89 bps in fees per year and focuses on the S&P 500 VIX Short-Term Futures Index, which reflects implied volatility in the S&P 500 Index at various points along the volatility forward curve. It provides investors with exposure to a daily rolling long position in the first and second months VIX futures contracts. The note was down 5.8% over the past week as Brexit fears eased (read: Market Fears Brexit: Volatility ETFs Take Full Advantage).

SPDR Gold Trust ETF (LAGOS:GLD)

Gold is often viewed as a store of value and a hedge against market turmoil. The product tracking this bullion like GLD (NYSE:GLD) could be an interesting pick to play the market turbulence. The fund tracks the price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA. It is the ultra-popular gold ETF with AUM of $37.1 billion and expense ratio of 0.40%. The ETF exchanges about 11 million shares in hand per day and shed 2.2% over the past week.

iShares 20+ Year Treasury Bond ETF (V:TLT)

The U.S. government bonds tracking the long end of the yield curve often have a safe haven status. The flight-to-safety on Brexit could push these bonds higher. As such, the ultra-popular long-term Treasury ETF – TLT – which tracks the ICE U.S. Treasury 20+ Year Bond Index has been in the spotlight. It has AUM of over $8.1 billion and average daily volume of more than 8.3 million shares. Expense ratio comes in at 0.15%. Holding 32 securities in its basket, the fund focuses on the top credit rating bonds with average maturity of 26.52 years and effective duration of 17.90 years. The fund lost 1.5% over the past week after chances of Britain staying in the EU increased (read: Treasury Headed for Best Run: 5 Outperforming ETFs).

CurrencyShares British Pound Sterling Trust FXB

As FXB tracks the movement of the British pound sterling relative to the U.S. dollar, it could see a wild ride in the months ahead if Britain chooses to depart from EU and a rally if it stays. The fund is illiquid, trading in volume of less than 23,000 shares a day, suggesting additional cost in the form of wide bid/ask spread beyond the expense ratio of 0.40%. The ETF has amassed $64.6 million in its asset base and has gained 3.5% over the past week (read: Growing Brexit Debate Brings ETFs in Focus).

iShares Edge MSCI Min Vol Europe ETF EUMV

Investors seeking safety from Brexit concerns but wanting to remain invested in Europe could also find EUMV an intriguing choice. This fund provides exposure to European stocks having lower volatility characteristics relative to the broader European developed equity markets. This can be easily done by tracking the MSCI Europe Minimum Volatility Index. Holding 140 securities in its basket, the fund is widely diversified across components with none holding more than 1.57% of assets. United Kingdom takes the top spot at 35.7% while Switzerland and France round off the next two spots with a double-digit exposure each. The fund has accumulated $30.9 million in its asset base and trades in paltry volume of 17,000 shares a day on average. It charges 35 bps in annual fees and gained 2.4% over the past week.


ISHARS-20+YTB (TLT): ETF Research Reports

SPDR-GOLD TRUST (GLD): ETF Research Reports

CRYSHS-BRI PD S (FXB): ETF Research Reports

IPATH-SP5 VX ST (VXX): ETF Research Reports

ISHARS-MS EU MV (EUMV): ETF Research Reports

ISHARS-UTD KING (EWU): ETF Research Reports

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