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Biggest Rate Hike in 27 years in U.K.: ETFs in Focus

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The Bank of England recently hiked interest rates by 50 basis points, marking its largest single increase since 1995, and predicted the U.K.’s longest recession since the global financial crisis, as quoted on CNBC. The sixth successive increase in rates make borrowing costs to 1.75% and marks the first half-point hike since 1997.

The bank now expects headline inflation to peak at 13.3% in October and to remain at elevated levels throughout much of 2023, before dropping to its 2% target in 2025. The Monetary Policy Committee noted that the labor market remains tight, with domestic cost and price pressures elevated, adding that there is a risk that a “longer period of externally generated price inflation will lead to more enduring domestic price and wage pressures.”

The inflation “largely reflects a near doubling in wholesale gas prices since May, owing to Russia’s restriction of gas supplies to Europe and the risk of further curbs,” the MPC said in its accompanying statement, as quoted on CNBC.

Britain’s energy regulator, Ofgem, increased the energy price cap by 54% from April to accommodate soaring global costs, but is expected to rise by a greater degree in October, with annual household energy bills predicted to surpass £3,600 ($4,396).

Against this backdrop, below we highlight a few UK ETFs and Pound ETF that should be followed closely.

iShares MSCI United Kingdom ETF (EWU - Free Report)

The underlying MSCI United Kingdom Index consists of stocks traded primarily on the London Stock Exchange. The $3.5-billion-fund charges 50 bps in fees and yields 4.73% annually.

Franklin FTSE United Kingdom ETF (FLGB - Free Report)

The underlying FTSE UK RIC Capped Index is a market-capitalization weighted index representing the performance of UK large and mid-capitalization stocks. The fund charges 9 bps in fees and yields 3.49% annually.

Invesco CurrencyShares British Pound Sterling Trust (FXB - Free Report)

The British pound sterling is the official currency of the United Kingdom and has been the currency of the accounts of the Bank of England since 1694. The Invesco CurrencyShares British Pound Sterling Trust is designed to track the price of the British pound sterling. The fund charges 40 bps in fees.

First Trust United Kingdom AlphaDEX Fund (FKU - Free Report)

The underlying First Trust United Kingdom AlphaDEX ETF seeks investment results that correspond generally to the price and yield, before the fees and expenses, of the NASDAQ AlphaDEX United Kingdom Index. The fund charges 80 bps in fees and yields 5.02% annually.

iShares MSCI United Kingdom Small-Cap ETF (EWUS - Free Report)

The underlying MSCI United Kingdom Small Cap Index measures the performance of equity securities of small-capitalization companies whose market capitalization represents the bottom 14% of the British securities market. Component companies include consumer discretionary, financial and industrial companies. The fund charges 59 bps in fees and yields 5.38% annually.