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Topic: ETFs

Brexit is the biggest challenge for this ETF


U.K. ETF LISTEN:  

The United Kingdom has one of the largest economies in Europe and is among the world’s top 10. However, over the near term, it faces major challenges. This includes Brexit and the prospect of leaving the European Union without clear arrangements to protect its vital trading links.

Better days will certainly arrive again for the U.K., but investors may have to wait until the uncertainty clears.

Here is one ETF that provides exposure to the top public companies in the U.K.

ISHARES MSCI UNITED KINGDOM ETF $30.10 (New York symbol EWU; TSINetwork ETF Rating: Aggressive; Market cap: $2.13 billion) invests in publicly listed U.K. companies.

Financial firms account for 21.2% of the ETF’s assets, while Energy (19.5%), Consumer Non-Cyclicals (16.5%), Healthcare (9.5%), Industrials (8.9%), Consumer Cyclicals (8.7%) and Basic Materials (8.1%) are other key segments.

The ETF holds a portfolio of 102 stocks; the top 10 make up 46.8% of its assets. Top holdings include HSBC Holdings (financial services; 7.1%), Royal Dutch Shell (energy, 11.3%), BP plc (financial services, 6.0%), Diageo (consumer, 4.4%), AstraZeneca (healthcare, 4.4%), GlaxoSmithKline (healthcare; 4.2%), British American Tobacco (consumer, 3.4%), Rio Tinto (basic materials, 3.0%) and Unilever (consumer, 2.9%).

The fund started up in March 1996 and charges an MER of 0.47%. It has a large asset base and offers excellent liquidity, with an average of $57.6 million in units trading daily.

The ETF pays a dividend twice a year; this amounted to $1.03 over the past 12 months for a high 3.4% yield.

The fund lost 3.4% over the past year compared with a 4.8% gain for the MSCI World Equity Markets Index. Over the past five years, the ETF lost 4.7% compared to a cumulative gain of 40.1% for the world markets index.

The economy of the United Kingdom measured $2.7 trillion in 2018, earning it the spot as the world’s 9th largest economy. Among the 28 member countries of the European Union—to which the U.K. still belongs, at least for now—the economy is the third-largest, after Germany and France, Still, the total EU economy is six times larger than Britain’s.

The U.K.’s population count is 65.1 million with a workforce of 33.5 million and a relatively low unemployment rate of 3.8%.

The main strength of the economy is its services component, which generates more than 70% of the overall economic activity. Financial services are a key component.

The country is also a large international trader: the value of its exports contribute 30% of its gross domestic product, while its imports drive 32% of economic activity.

The bulk of the Britain’s trade is with Europe; exports to the EU accounted for 46% of the total, while imports from the EU made up 54% of all imports.

The unencumbered movement of goods, services and people and the harmonization of trading and customs rules between the U.K. and Europe helped to establish this very deep relationship.

The exit from the European Union will have a significant impact on British trade and the economy, especially if no trade agreement is reached before Brexit. This scenario is a strong possibility, with new Prime Minister Boris Johnson dedicated to a formal break in October 2019. That’s with or without a deal (see box below for more details).

 

The U.K. has a reasonable government budget deficit of 1.2% of GDP, but it also has a relatively high public debt of 85% of GDP. Inflation is low at 2.0% and the Bank of England policy interest rate is currently at 0.75%. Ten-year government bond yields are at 0.65%. The rating agencies consider the government’s external debt to be of a high investment grade.

The British pound is a free-floating currency that has been on a downward trajectory against the U.S. dollar for the past five years. The Brexit referendum that prompted the U.K.’s withdrawal from the EU only sped up the decline. The British pound is now trading very close to its lowest level in more than 30 years.

For aggressive investors who want exposure to British companies, the iShares MSCI United Kingdom ETF is a sound choice.

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