Europe has finally broken free from a prolonged recession. And
one of the region's weakest members, the UK, is now leading the way
in a broader European recovery. The nation revisited the growth
path in the first quarter of this year going against analysts'
forecast of a triple-dip recession.
Economic growth in the U.K. continues with 0.7% recorded in the
second quarter and 0.8% in the third, reflecting the
pace in more than three years. Despite tough comparisons owing to
last year's Olympics and Paralympics, Q3's GDP was also
higher on a year-on-year basis.
The expansion was broad based with agriculture, services,
manufacturing and construction all posting sizable growth. Output
growth from the service sector has now inched past its prior peak
in the first quarter of 2008. Also, the UK's largest trading
partner - Eurozone - has started to expand thus providing a
much-needed boost to the business confidence of the former (read:
Play a Resurgent Europe with These ETFs
In fact, the third-quarter growth was no less robust than that of
the U.S. economy which grew 2.8% on an annualized basis including
as much as 0.8% weight toward inventory pile-up. Investors should
note that, the U.K. growth is presented on a quarterly basis; it's
not an annual run.
As per the
, the U.K. economy registered an annualized GDP growth rate of 3.2%
in the third quarter, 40 basis points above the Q2 figure. Quite
expectedly, this bullish data gave investors a reason to lean on
developed markets once again.
Upbeat Economic Indicators Roundup
Falling Unemployment Rate
With the economy gathering strength, the
in the U.K. (7.6%) fell to the lowest level in over four years in
Q3. The rate bettered the Bank of England (BOE)'s prior
The BOE moved forward the achievement of its threshold jobless rate
target (7.0% or lower) to 3Q 2015 from its earlier timeline of 2016
end. The Monetary Policy Committee sees only a two-in-five
probability of reaching this goal by 2014's end.
Smooth Inflation Track
: The CPI (consumer price index) numbers in the economy have been
oscillating in the range of 1.0% plus to 2.0% plus since September
2004 barring some occasional spikes. This probably explains the
persistent cut in the key policy rate by the Central Bank.
The CPI numbers fell sharply to 2.2% in October 2013 from 2.7% in
September which Prime Minister David Cameron deemed as "
news for hard-working people". Inflation took a major step toward
the target limit of 2.0% thanks to the monetary authority.
Easing Pressure on Interest Rate Policy:
The economy has been witnessing significant rate cuts since July
2007 when the benchmark rate then was 5.75%. Since then, the
interest rates have been reduced by 5.25% in total.
The monetary authority plans to leave interest rate unchanged at
the ultra-low level of 0.5% unless unemployment rate falls to 7% or
lower. However, while better jobs data and improved GDP
sparked up the possibility of an interest rate hike among
investors, the fall in inflation offsets the likelihood of this
Euro ETFs in Focus After Surprise ECB Rate Cut
Some Respite for Currency
The British Pound Sterling has been awaiting a turnaround for the
past few months and finally seems to have got a boost from stronger
economic recovery in the U.K. that spurred speculations about the
central bank's less accommodative monetary policy ahead of the
To add to this, the Fed's prospective head Janet Yellen's dovish
comment about the continuation of the QE program provided a relief
to the struggling currency pushing it up more than 6.0% relative to
greenback in the last four-month period (as of November 15, 2013).
Raised Growth Outlook:
To reflect better-than-anticipated data economic data, the central
bank lifted its GDP growth forecast for 2013 to
from 1.4% projected in August. The economy is now looking to expand
2.8% in 2014.
How to Play?
While much work is still left to fully regain the ground lost in
the crisis, the U.K. remains an interesting choice for investors
looking to play on European recovery but without euro exposure. For
those seeking to tap this developed economy in ETF form, there are
three options available at this time, each of which we have
highlighted below (read:
3 European ETFs Leading the Recovery
iShares MSCI United Kingdom ETF (
Launched in March 1996, EWU is the largest and the most popular
British ETF having AUM of about $3.36 billion and trading at an
average daily volume of 1,100,000 shares.
It tracks the MSCI United Kingdom Index. The capitalization
weighted index holds some of the biggest names in the U.K. equity
markets such as HSBC Holdings plc, Vodafone Group plc, and BP plc.
The ETF has now grown 16.43% in the last one year ending September
30, 2013. EWU holds109 securities presently and allocates around
42.5% of its total assets in the top 10 holdings thus carrying a
certain concentration risk.
The ETF charges 49 basis points in fees and expenses to investors.
The fund currently carries a Zacks ETF Rank #1 (Strong Buy).
First Trust United Kingdom AlphaDEX (
Launched in February 2012, FKU is a relatively newer product in the
British ETF list. It tracks the Defined United Kingdom Index and
employs the AlphaDEX methodology of stock selection.
According to this methodology, stocks are chosen from the S&P
United Kingdom BMI universe and ranked on the basis of various
fundamental growth and value factors.
The higher ranked stocks receive a bigger weighting while the
lowest rated securities are excluded entirely. The ETF seeks to
outperform the underlying index, thereby generating positive '
On the flip side, investors are charged a hefty premium of 80 basis
points in fees on account of its enhanced methodology. So far, the
ETF has managed to generate total assets worth $21.8 million and
has an average daily volume of about 4,500 shares. The fund
currently has a Zacks ETF Rank #2 (Buy).
iShares MSCI United Kingdom Small Cap (
EWUS is yet another product tapping the U.K. markets but in the
small cap space. EWUS debuted in January 2012 and looks to follow
the performance of the MSCI United Kingdom Small Cap Index (see
Europe ETF Investing 101
The index measures equity performance of small cap companies whose
market capitalization represents the bottom 14% of the U.K equity
Holding 238 securities in the portfolio, the fund has amassed about
$19.2 million in assets. EWUS allocates its assets in almost an
equal weight ensuring that concentration risk is nearly
diversified. Just 13% exposure in the top 10 holdings also confirms
Unfortunately, the expense ratio for the fund stays high at 59
basis points. The product added a massive 33% return in the last
one year ending September 30, 2013.
Given its small cap bias, the ETF is expected to outperform the
broader market in case of an economic recovery, as small caps tend
to top their large and mid cap counterparts at times of recovery.
The fund currently has a Zacks ETF Rank #3 (Hold).
While signs of economic revitalization are on the horizon, there
are also bumps ahead for the British economy. Gains, mainly from
housing, have helped drive growth so far this year, but
unemployment still remains high.
As per the
, though ticked-up, activity levels still fall short of the
historic averages. Also, the BOE feels inflation will likely inch
up in the upcoming months once the new utility prices are effective
and that quarterly GDP growth rates may soften next year.
Despite this cautious comment, the nation is better placed than
most other European countries and the aforementioned funds could
move higher in the coming months as depicted by their favorable
ranks, and the solid trends at their backs.
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ISHARS-UTD KING (EWU): ETF Research Reports
ISHARS-MS UK SC (EWUS): ETF Research Reports
FT-UTD KINGDOM (FKU): ETF Research Reports
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