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Is This the Right Time to Dive Into UK ETFs as Inflation Falls?
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In April, the rate of British inflation experienced a decline, although the decrease was not as significant as anticipated. Nevertheless, it continues to surpass the rate of price growth in the United States and many European nations, leading to mounting pressure on the Bank of England to pursue further interest rate hikes.
According to a Reuters article, the annual increase in Britain's consumer price index was 8.7%, showing a decline from 10.1% in March and 11.1% in October last year. Despite this moderation, the country continues to have the highest inflation rate among the Group of Seven advanced economies, on par with Italy.
High Gas Price, Brexit & Other Factors Causing Inflation
Due to its reliance on imported gas for electricity generation, the U.K. was severely impacted by the surge in gas prices following Russia's invasion of Ukraine. Brexit and the subsequent barriers to trade have caused delays and increased costs for imports and exports.
Additionally, the end of the free movement of workers from EU countries has worsened the labor shortage in the U.K., leading to higher wages and ultimately higher prices for consumers.
Another Hike by BOE?
According to rate futures, investors are anticipating a 100% likelihood of the Bank of England (BoE) increasing rates to at least 4.75% in June from the current rate of 4.5%. Additionally, there is a roughly 60% probability that rates will reach 5.5% by November.
Bank of America and Nomura (a Japanese bank) have revised their forecasts, now expecting the BoE to raise its main interest rate three more times to 5.25% by September. Credit Suisse and Citi, on the other hand, project two more increases to reach 5%.
Positive Growth Forecasts for the Economy
Per BBC, the International Monetary Fund (IMF) has provided an optimistic outlook for the U.K. economy, projecting that it will avoid a recession this year. In a significant upgrade to its previous forecast, the IMF now expects the U.K. to experience a growth rate of 0.4% in 2023, whereas last month, it had predicted a contraction of 0.3%.
This improved growth projection is attributed to several factors, including resilient demand, decreasing energy prices, reduced concerns over Brexit, and enhanced financial stability. The positive impact of falling energy prices has played a significant role in boosting the overall growth outlook for the U.K. economy.
ETFs in Focus
Although the economy is still withstanding high inflation, positive growth forecasts by the IMF may help with the turnaround. Below, we highlight a few pure-play U.K. ETFs.
With an asset base of $3 billion and 80 securities in its basket, iShares MSCI United Kingdom ETF has major allocation in consumer staples (19.43%), financials (18.77%) and health care sectors (13.71%). It charges an annual fee of 0.50%.
Having a Zacks ETF Rank #3 (Hold) and a Medium risk outlook, the fund has generated returns of 5.81% year to date and 1.45% over the past year.
The fund has gathered an asset base of $562.65 million and has a basket of 112 securities. Financials, consumer staples and health-care sectors take the top spot with a share of 18.3%, 18.07% and 12.41%, respectively. FLGB charges an annual fee of 0.09%.
Franklin FTSE United Kingdom ETF has a Zacks ETF Rank #3 and has earned 6.75% year to date. The fund has added 3.04% over the past year.
First Trust United Kingdom AlphaDEX Fund (FKU - Free Report)
FKU has amassed an asset base of $21.87 million and charges an annual fee of 0.80%. With a basket of 77 securities, consumer discretionary, financials and industrials take the top spot with a share of 21.2%, 18.85% and 13015%, respectively.
First Trust United Kingdom AlphaDEX Fund has a Zacks ETF Rank #3 with a Medium risk outlook and has gained 5.86% year to date. However, the fund has fallen 2.41% over the past year.
iShares MSCI United Kingdom Small-Cap ETF (EWUS - Free Report)
EWUS has an asset base of $46.29 million and a basket of 252 securities. Industrials, financials and consumer discretionary take the top spots with a share of 22.36%, 16.92% and 16.22%, respectively. The fund charges an annual fee of 0.59%.
iShares MSCI United Kingdom Small-Cap ETF has a Zacks ETF Rank #3 with a Medium risk outlook and has generated 4.17% year to date. However, the fund has fallen by 8.66% over the past year.
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Is This the Right Time to Dive Into UK ETFs as Inflation Falls?
In April, the rate of British inflation experienced a decline, although the decrease was not as significant as anticipated. Nevertheless, it continues to surpass the rate of price growth in the United States and many European nations, leading to mounting pressure on the Bank of England to pursue further interest rate hikes.
According to a Reuters article, the annual increase in Britain's consumer price index was 8.7%, showing a decline from 10.1% in March and 11.1% in October last year. Despite this moderation, the country continues to have the highest inflation rate among the Group of Seven advanced economies, on par with Italy.
High Gas Price, Brexit & Other Factors Causing Inflation
Due to its reliance on imported gas for electricity generation, the U.K. was severely impacted by the surge in gas prices following Russia's invasion of Ukraine. Brexit and the subsequent barriers to trade have caused delays and increased costs for imports and exports.
Additionally, the end of the free movement of workers from EU countries has worsened the labor shortage in the U.K., leading to higher wages and ultimately higher prices for consumers.
Another Hike by BOE?
According to rate futures, investors are anticipating a 100% likelihood of the Bank of England (BoE) increasing rates to at least 4.75% in June from the current rate of 4.5%. Additionally, there is a roughly 60% probability that rates will reach 5.5% by November.
Bank of America and Nomura (a Japanese bank) have revised their forecasts, now expecting the BoE to raise its main interest rate three more times to 5.25% by September. Credit Suisse and Citi, on the other hand, project two more increases to reach 5%.
Positive Growth Forecasts for the Economy
Per BBC, the International Monetary Fund (IMF) has provided an optimistic outlook for the U.K. economy, projecting that it will avoid a recession this year. In a significant upgrade to its previous forecast, the IMF now expects the U.K. to experience a growth rate of 0.4% in 2023, whereas last month, it had predicted a contraction of 0.3%.
This improved growth projection is attributed to several factors, including resilient demand, decreasing energy prices, reduced concerns over Brexit, and enhanced financial stability. The positive impact of falling energy prices has played a significant role in boosting the overall growth outlook for the U.K. economy.
ETFs in Focus
Although the economy is still withstanding high inflation, positive growth forecasts by the IMF may help with the turnaround. Below, we highlight a few pure-play U.K. ETFs.
iShares MSCI United Kingdom ETF (EWU - Free Report)
With an asset base of $3 billion and 80 securities in its basket, iShares MSCI United Kingdom ETF has major allocation in consumer staples (19.43%), financials (18.77%) and health care sectors (13.71%). It charges an annual fee of 0.50%.
Having a Zacks ETF Rank #3 (Hold) and a Medium risk outlook, the fund has generated returns of 5.81% year to date and 1.45% over the past year.
Franklin FTSE United Kingdom ETF (FLGB - Free Report)
The fund has gathered an asset base of $562.65 million and has a basket of 112 securities. Financials, consumer staples and health-care sectors take the top spot with a share of 18.3%, 18.07% and 12.41%, respectively. FLGB charges an annual fee of 0.09%.
Franklin FTSE United Kingdom ETF has a Zacks ETF Rank #3 and has earned 6.75% year to date. The fund has added 3.04% over the past year.
First Trust United Kingdom AlphaDEX Fund (FKU - Free Report)
FKU has amassed an asset base of $21.87 million and charges an annual fee of 0.80%. With a basket of 77 securities, consumer discretionary, financials and industrials take the top spot with a share of 21.2%, 18.85% and 13015%, respectively.
First Trust United Kingdom AlphaDEX Fund has a Zacks ETF Rank #3 with a Medium risk outlook and has gained 5.86% year to date. However, the fund has fallen 2.41% over the past year.
iShares MSCI United Kingdom Small-Cap ETF (EWUS - Free Report)
EWUS has an asset base of $46.29 million and a basket of 252 securities. Industrials, financials and consumer discretionary take the top spots with a share of 22.36%, 16.92% and 16.22%, respectively. The fund charges an annual fee of 0.59%.
iShares MSCI United Kingdom Small-Cap ETF has a Zacks ETF Rank #3 with a Medium risk outlook and has generated 4.17% year to date. However, the fund has fallen by 8.66% over the past year.