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Can UK ETFs Win on Rising Jobless Rate & Slowing Inflation?
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The United Kingdom witnessed an unanticipated surge in the unemployment rate as it rose to 3.9% three months into March. According to an article on Reuters, the surge in the unemployment rate was against the backdrop of people seeking to get back in the job market and being counted as belonging to the job market, as stated by the Office of National Statistics (ONS).
The Bank of England (BoE) has raised concerns about a shortage of potential candidates to fill job vacancies, which is contributing to significant wage increases and fueling inflation. According to the data from the Office for National Statistics (ONS), the growth rate of wages remained robust, with a slight uptick in basic wages propelled by the public sector. However, the overall increase in total pay, including bonuses, remained stable.
BoE Could Act Less Hawkish
The recent surge holds the potential to mitigate the Bank of England's concerns regarding inflation pressures, prompting investors to scale back some of their expectations for additional interest rate hikes by the bank.
However, despite the ongoing debate at the Bank of England about whether to raise interest rates further, the growth in pay rates remained notably strong compared to historical averages. In the three-month period till March 2023, basic pay increased by 6.7%, up slightly from 6.6% in the prior three months until February. Investors are putting a 92% chance on a 25 basis-point increase in Bank Rate to 4.5% and a roughly 50 chance of hitting 5% by August, per Reuters.
Dangers of Inflation Still Loom Large
Per Reuters, to prevent a scenario where inflation could bottom out at 4% or 5%, rather than returning to its target of 2%, the Bank of England must take measures to prevent second-round inflationary effects. Last week, the Bank of England raised its main interest rate to 4.5% from 4.25%, marking the 12th consecutive rate rise.
In March, consumer price inflation in the UK reached 10.1%, the highest among major Western economies. The Bank's intention is to avoid a situation where the primary drivers of short-term inflation, such as escalating energy and food prices, disappear, yet businesses and workers continue to demand significant price and wage hikes.
ETFs in Focus
Below we highlight a few ETFs with exposure to the United Kingdom. Notably, all UK ETFs lost in the past one-week period (as of May 16, 2023), while most products lost in the past one-month frame. We do not expect a remarkable turnaround in ETFs’ performance in the near term due to still-present rate hike worries.
The iShares MSCI United Kingdom ETF seeks investment results that generally correspond to the price and yield performance of the MSCI United Kingdom Index, which consists of stocks traded primarily on the London Stock Exchange. With 80 securities in its basket, EWU has gathered an asset base of $3.02 billion.
The fund has major sector allocations to consumer staples, financials and health care, with 19.57%, 18.32% and 13.80%, respectively. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook. EWU has generated returns of 9.95% in the past year and 2.26% in the past three months.
The Franklin FTSE United Kingdom ETF seeks to provide investment results that closely correspond to the performance of the FTSE UK RIC Capped Index, which represents the performance of UK large and mid-capitalization stocks. FLGB has a basket of 111 securities and has amassed $576.25 million in its asset base.
The fund has major sector allocations to consumer staples, financials and health care with 18.15%, 17.96% and 12.59%, respectively. It has Zacks ETF Rank #3 (Hold), earning 9.37% in the past year and 1.92% in the past three months.
iShares MSCI United Kingdom Small-Cap ETF (EWUS - Free Report)
iShares MSCI United Kingdom Small-Cap ETF seeks investment results that generally correspond to the price and yield performance of the MSCI United Kingdom Small Cap Index. EWUS has 254 securities in its basket, having amassed an asset base of $46.69 million.
The fund has major sector allocations to industrials, financials and consumer discretionary with 21.99%, 16.42% and 16.21%, respectively. It has a Zacks ETF Rank #3 (Hold) and a Medium risk outlook. EWUS has fallen 1.53% in the past year but earned 0.27% in the past three months.
First Trust United Kingdom AlphaDEX Fund (FKU - Free Report)
First Trust United Kingdom AlphaDEX ETF seeks investment results that generally correspond to the price and yield of the NASDAQ AlphaDEX United Kingdom Index. The fund has a basket of 76 securities along with an asset base of $22.47 million.
FKU has major sector allocations to consumer discretionary, financials and industrials with 21.93%, 18.27% and 12.79%, respectively. It has Zacks ETF Rank #3 (Hold) with a Medium risk outlook, earning 4.28% in the past year but falling 0.42% in the past three months.
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Can UK ETFs Win on Rising Jobless Rate & Slowing Inflation?
The United Kingdom witnessed an unanticipated surge in the unemployment rate as it rose to 3.9% three months into March. According to an article on Reuters, the surge in the unemployment rate was against the backdrop of people seeking to get back in the job market and being counted as belonging to the job market, as stated by the Office of National Statistics (ONS).
The Bank of England (BoE) has raised concerns about a shortage of potential candidates to fill job vacancies, which is contributing to significant wage increases and fueling inflation. According to the data from the Office for National Statistics (ONS), the growth rate of wages remained robust, with a slight uptick in basic wages propelled by the public sector. However, the overall increase in total pay, including bonuses, remained stable.
BoE Could Act Less Hawkish
The recent surge holds the potential to mitigate the Bank of England's concerns regarding inflation pressures, prompting investors to scale back some of their expectations for additional interest rate hikes by the bank.
However, despite the ongoing debate at the Bank of England about whether to raise interest rates further, the growth in pay rates remained notably strong compared to historical averages. In the three-month period till March 2023, basic pay increased by 6.7%, up slightly from 6.6% in the prior three months until February. Investors are putting a 92% chance on a 25 basis-point increase in Bank Rate to 4.5% and a roughly 50 chance of hitting 5% by August, per Reuters.
Dangers of Inflation Still Loom Large
Per Reuters, to prevent a scenario where inflation could bottom out at 4% or 5%, rather than returning to its target of 2%, the Bank of England must take measures to prevent second-round inflationary effects. Last week, the Bank of England raised its main interest rate to 4.5% from 4.25%, marking the 12th consecutive rate rise.
In March, consumer price inflation in the UK reached 10.1%, the highest among major Western economies. The Bank's intention is to avoid a situation where the primary drivers of short-term inflation, such as escalating energy and food prices, disappear, yet businesses and workers continue to demand significant price and wage hikes.
ETFs in Focus
Below we highlight a few ETFs with exposure to the United Kingdom. Notably, all UK ETFs lost in the past one-week period (as of May 16, 2023), while most products lost in the past one-month frame. We do not expect a remarkable turnaround in ETFs’ performance in the near term due to still-present rate hike worries.
iShares MSCI United Kingdom ETF (EWU - Free Report)
The iShares MSCI United Kingdom ETF seeks investment results that generally correspond to the price and yield performance of the MSCI United Kingdom Index, which consists of stocks traded primarily on the London Stock Exchange. With 80 securities in its basket, EWU has gathered an asset base of $3.02 billion.
The fund has major sector allocations to consumer staples, financials and health care, with 19.57%, 18.32% and 13.80%, respectively. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook. EWU has generated returns of 9.95% in the past year and 2.26% in the past three months.
Franklin FTSE United Kingdom ETF (FLGB - Free Report)
The Franklin FTSE United Kingdom ETF seeks to provide investment results that closely correspond to the performance of the FTSE UK RIC Capped Index, which represents the performance of UK large and mid-capitalization stocks. FLGB has a basket of 111 securities and has amassed $576.25 million in its asset base.
The fund has major sector allocations to consumer staples, financials and health care with 18.15%, 17.96% and 12.59%, respectively. It has Zacks ETF Rank #3 (Hold), earning 9.37% in the past year and 1.92% in the past three months.
iShares MSCI United Kingdom Small-Cap ETF (EWUS - Free Report)
iShares MSCI United Kingdom Small-Cap ETF seeks investment results that generally correspond to the price and yield performance of the MSCI United Kingdom Small Cap Index. EWUS has 254 securities in its basket, having amassed an asset base of $46.69 million.
The fund has major sector allocations to industrials, financials and consumer discretionary with 21.99%, 16.42% and 16.21%, respectively. It has a Zacks ETF Rank #3 (Hold) and a Medium risk outlook. EWUS has fallen 1.53% in the past year but earned 0.27% in the past three months.
First Trust United Kingdom AlphaDEX Fund (FKU - Free Report)
First Trust United Kingdom AlphaDEX ETF seeks investment results that generally correspond to the price and yield of the NASDAQ AlphaDEX United Kingdom Index. The fund has a basket of 76 securities along with an asset base of $22.47 million.
FKU has major sector allocations to consumer discretionary, financials and industrials with 21.93%, 18.27% and 12.79%, respectively. It has Zacks ETF Rank #3 (Hold) with a Medium risk outlook, earning 4.28% in the past year but falling 0.42% in the past three months.