Though August was a rough month for global equities, European
stocks have shown strong recovery on the back of upbeat data,
less concerns on debt levels and a firmer currency. The Euro zone
has finally emerged out of its six-quarter long recession and is
slowly improving now(read:
4 Outperforming ETFs Leading Europe Higher
WISDMTR-UK HEQ (DXPS): ETF Research Reports
ISHARS-UTD KING (EWU): ETF Research Reports
ISHARS-MS UK SC (EWUS): ETF Research Reports
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The UK is leading the way in the broad European recovery, having
easily dodged the triple dip recession. The economy surprisingly
picked up growth at 0.7% in the second quarter, up from 0.3% in
the first quarter buoyed by rising housing prices and increasing
consumer confidence. The expansion was broad based with services,
manufacturing and construction all turning to strong growth.
According to data from
, the service sector grew in two months back to back and at the
fastest pace in six years in August. Manufacturing activity also
expanded to two and half year high while construction sector
improved since June 2010.
The series of solid data was welcomed by investors, suggesting
growing optimism on the economy (read:
European ETFs: A Surge in Popularity?
, The Organization for Economic Co-operation and Development
(OECD) expects the economy to grow 1.7% in the second half of the
year and outstrip the larger Euro zone economies.
Additionally, the international agency lifted its growth outlook
to 1.5% from 0.8% for this year while the IMF expects the economy
to expand from 0.6% to 0.9% this year.
Despite the fact that the country lost its AAA credit rating from
two major agencies (Fitch and Moody) earlier this year, it poses
an extremely strong credit profile, higher transparency, flexible
monetary policy as well as high degree of political and social
British ETFs Face Credit Downgrade
Further, unemployment remained unchanged at 7.8% in the second
quarter. Inflation seems to be under control and is slowly
cooling off to touch the 2% target set by the Bank of England. In
fact the Inflation fell to 2.8% in July.
Moreover, the currency, British Pound, is showing resiliency when
other European currencies are struggling. The British Pound
gained over 2% against the greenback over the past two months
(see more in the
Although Britain is currently the fastest growing nation in
Europe, it is by no means risk free. The country continues to
have one of the highest budget deficits in the European Union at
nearly 6% of GDP. In fact, the country's trade balance dropped to
$9.85 billion for August against the analyst expectation of $8.15
billion, but was up from $8.17 billion in July.
Additionally, the national debt level is persistently rising and
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
These factors would continue to weigh on British recovery and
pose major threats to economic growth (read:
Are UK ETFs in Serious Trouble?
How to Play
Considering the pros and cons, investors seeking to tap the
country could choose from the following four ETFs. These products
have provided handsome returns so far this year and could
continue to trend higher if the UK economy improves further (see:
all the European ETFs here
iShares MSCI UK Index Fund (
This fund is by far the most popular and liquid ETF tracking the
British economy with AUM of $2.7 billion and average daily volume
of nearly 2.1 million shares. It tracks the MSCI United Kingdom
Index and holds 108 securities in its basket. The fund charges 50
bps in fees per year from investors.
The product does a decent job of spreading assets, as not even a
single stock in the basket makes up more than 7.57% of the
portfolio. From a sector look, financials is the top sector at
21.08%, closely followed by energy (16.34%) and consumer staples
(16.30%). The ETF added over 8% so far this year.
WisdomTree United Kingdom Hedged Equity Fund (
The newest entrant in the UK space comes from WisdomTree and its
DXPS. The fund offers a unique way to capitalize the returns from
the leading U.K. firms while hedging exposure to the British
pound by tracking the WisdomTree United Kingdom Hedged Equity
WisdomTree Launches New Hedged Japan and UK
The fund manages a basket of 137 stocks and is well spread out
across each security with none holding more than 5.7%. In terms
of sector exposure, consumer staples, financials, energy and
materials round off to the top four with double-digit
The ETF often seeks to outperform when the pound weakens and
underperform when the pound is surging against the U.S. dollar.
DXPS has garnered enough investor interest and accumulated $37.9
million in total assets in just two months of its launch. The
fund charges 48 bps in fees per year and is up 5.3% since
iShares MSCI United Kingdom Small Cap (
This product targets the small cap segment of the UK markets by
tracking the MSCI United Kingdom Small Cap Index. The product has
amassed $9.1 million in its asset base while volume is light
trading in less than 4,000. It charges 59 bps in fees from
investors a year.
In total, the ETF holds 235 securities in its basket and
allocates its assets uniformly across all securities ensuring
that concentration risk is diversified. However, the fund is
skewed towards consumer discretionary with about one-fourth of
the portfolio, closely followed by industrials and financials
with 19% share each.
Given its small cap bias, EWUS is expected to outperform the
broader market in the ongoing economic recovery (read:
3 Small Cap ETFs Leading the Market Higher
). The fund gained more than 20% in the year-to-date time frame.
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