On Friday, Britain was hit as Fitch downgraded the nation's
credit rating by a notch from AAA status thanks to sluggish
growth prospects and worries over the country's debt load (read:
Poland: A Better Eastern Europe ETF?
This is the second rating cut for the British economy this
year. In February, rating agency Moody Investor Service
downgraded the UK to Aa1 form its supreme AAA rating.
Fitch warned that the country might once again fall into a
recession due to its shrinking private and public sector on one
hand, and the rising budget deficit and debt level on the other.
The agency now expects the UK to grow 0.8% this year and 1.8% in
the next from its previous forecast of 1.5% and 2%,
The British national debt is expected to cross 100% of GDP in
2015-2016, but then decline gradually from 2017-2018. Further,
real GDP is not expected to return to the 2007 level until 2014,
suggesting that it could still be a while before Britain reaches
its pre-recession heights. This underscores the weakness of the
recovery, and puts extra pressure on the government's fiscal
consolidation efforts (read:
Are UK ETFs in Serious Trouble?
Despite the fact that the UK has lost its AAA credit rating
from two major agencies, it poses an extremely strong credit
profile, higher transparency, flexible monetary policy as well as
high degree of political and social stability.
However, the ongoing domestic public and private sector
deleveraging process and higher-than-projected debt and deficits
continue to overshadow the UK economy and impede its
Given this weakness and the lack of catalysts to pull the
country out of the malaise, investors who have bet their money in
the area must be on the edge. For these investors, we highlight
to keep an eye on if this slowdown turns into a dreaded triple
dip recession (see more ETFs in the
iShares MSCI UK Index Fund (
This is by far the most popular ETF tracking the British
economy, as it has roughly $1.5 billion in AUM. Launched in Mar
1996, it is also the cheapest and the oldest equity product for
the nation, costing investors 51 basis points a year in fees. The
fund is liquid, trading in a volume of 1.2 million shares per
The fund tracks the MSCI United Kingdom Index and holds 107
stocks in its basket. It has a definite tilt towards large cap
securities, as 80% of the assets accounts for this cap level.
The product does a decent job of spreading assets though, as
not a single stock in the basket makes up more than 7.5% of the
portfolio. HSBC Holdings (
), Vodafone (
) and BP plc (
) are the top three holdings with a combined share of less than
From a sector look, the fund is also well diversified with
financials and consumer staples taking up about 20% and 18%
share, respectively. Beyond these, energy (17%), materials (10%),
and health care (9%) round out the top five (read:
Do Country ETFs Really Provide
The ETF has added 0.28% so far this year and yields a good
3.60% dividend annually. EWU currently has a Zacks Rank of 3 or
'Hold', suggesting that the fund will perform on par with the
First Trust United Kingdom AlphaDEX Fund (
Launched in Feb 2012, FKU is the latest fund that provides
exposure to the UK stock market by employing the AlphaDEX
methodology. This methodology uses fundamental growth and value
factors to select stocks from the S&P United Kingdom BMI
Hopefully by using this methodology, and giving higher
weighting to more favorably ranked firms, FKU should generate
positive alpha relative to traditional passive indices.
In terms of its portfolio, the product is highly exposed to
three main sectors - consumer discretionary, industrials and
financials - each representing at least 20% share on average.
From an individual stock perspective, the fund does an excellent
job of spreading out assets as none of the stocks makes up more
than 3% of the portfolio, thus preventing a heavy
The ETF has failed to gain a great deal of popularity though,
as its AUM is just $18.6 million and average daily volume is
about 6,000 shares. Also, it is quite expensive charging an
annual fee of 80 bps on account of its unique methodology. The
fund gained 1.32% year-to-date and pays a good dividend yield of
This fund currently has a Zacks ETF Rank of 3 or 'Hold' as
iShares MSCI United Kingdom Small Cap (
EWUS is another product tapping the U.K markets. It was
launched in Jan 2012 and seeks to match the price and yield
performance of the MSCI United Kingdom Small Cap Index, before
fees and expenses. The index measures the equity performance of
small cap companies, the market capitalization of which
represents the bottom 14% of the UK equity markets (read:
Small Cap Japan ETFs: Overlooked Winners?
The fund holds 248 securities and puts less than 14% in the
top 10 firms. EWUS allocates its assets uniformly across all
securities ensuring that concentration risk is nearly diversified
away. The ETF can be a good tool for investors looking for
European exposure for their portfolio and at the same time allow
them to play a UK recovery as well.
The fund is skewed towards consumer discretionary with about
one-fourth of the portfolio, closely followed by industrials and
financials with a combined share of 39%. Other sectors make a
nice mix in the portfolio. The product has amassed $4.8 million
in its asset base and has a wide bid/ask spread thanks to its
relatively illiquid nature. It charges 59 bps in fees from
investors a year.
Given its small cap bias, the ETF is expected to outperform
the broader markets in case of an economic recovery, as small
caps outperform their large and mid cap counterparts in times of
recovery. The fund is up 4.71% in the year-to-date time frame
with paltry yield of 0.99%.
However, investors should also remember that small caps
generally underperform during long periods of market weakness.
This could be the case in the months ahead if Britain continues
to struggle, so EWUS could be thought of as a higher risk, higher
reward play on the British ETF market.
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ISHARS-UNITED K (EWU): ETF Research Reports
ISHARS-MS UK SC (EWUS): ETF Research Reports
FT-UTD KINGDOM (FKU): ETF Research Reports
HSBC HOLDINGS (HBC): Free Stock Analysis
VODAFONE GP PLC (VOD): Free Stock Analysis
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