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Growing Brexit Debate Brings ETFs in Focus

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The debate on Brexit is heating up with June 23 drawing closer. It is the day when Britain will vote on the crucial issue of whether it should remain a member of the EU. There has been a steady rise in Eurosceptics over the past decade pressing for a referendum largely because of Europe’s migration crisis and continued Euro zone travails. Although chances of Brexit were slim a couple of years back, the perpetual problems in the EU have over time narrowed the polls (read: Greek Woes to Impact Brexit? ETFs in Focus).

As per a survey conducted by YouGov, an online research firm, it was found that the campaign for a Brexit has gained a lead of 4-to-5 percentage point over those who want to remain, while 11% were still undecided.

Meanwhile, several leaders from Germany, Ireland, the Netherlands and Spain and other EU countries have issued a series of warnings about the economic consequences of a Brexit. Apart from that, the Federal Reserve chair Janet Yellen has warned that Brexit could have significant economic repercussions for the U.S.

Many market participants believe a Brexit would lead to a weaker currency owing to worries about Britain's £229 billion annual trade with the EU, which could suffer if new trade barriers are raised. One of the major advantages of remaining with the EU is free trade between member nations, which makes exporting goods to other EU countries easier and cheaper for British companies. Thus, Brexit could have a negative impact on Britain’s GDP. Lower GDP growth and tougher export conditions would hit several sectors like retail and financial services among others and therefore have an unfavorable impact on British equities.

On the other side of the coin, the country could form deeper ties with other countries outside the EU. However, it can’t be exactly predicted what would happen if Britain exits the EU, as there has been no precedence.

Whether the UK will ultimately choose Brexit or select to remain in the EU remains to be seen. But polls and political propaganda are likely to continue to stimulate uncertainty in the short term. In this scenario, we highlight three ETFs that are primarily exposed to British equities and two sterling currency funds, which are likely to be on investors’ radar in the coming days (see: all the European Equity ETFs here).
 
iShares MSCI United Kingdom ETF (EWU - Free Report)
 
This product tracks the MSCI United Kingdom Index. In total, it holds 116 securities with almost 40% of its assets allocated to the top 10 holdings. EWU is popular and actively traded with AUM of $2.1 billion and average daily volume of more than 4.1 million shares. From a sector look, financials takes the top spot at 21.1% while consumer staples, energy, health care and consumer discretionary round off the top five. The ETF charges 48 bps in annual fees. It has a Zacks ETF Rank #3 or ‘Hold’ rating with a Medium risk outlook. The fund has gained 2.7% in the last one month (as of June 6, 2016).

First Trust United Kingdom AlphaDEX ETF FKU
 
This fund provides exposure to 74 firms by tracking the NASDAQ AlphaDEX United Kingdom Index. The fund has amassed $158.1 million in its asset base while it has an average daily volume of more than 33,000 shares. None of the firms accounts for more than 3% of the total assets.
 
Sector-wise, financials takes the top spot at about 30.8% share while consumer discretionary, industrials and information technology also have double-digit allocation. FKU charges a fee of 80 bps annually and has a Zacks ETF Rank #3 with a Medium risk outlook. The fund is up 3.6% in the last one month (as of June 6, 2016) (read: UK ETFs in Focus as BOE Keeps Rate Unchanged).
 
iShares MSCI United Kingdom Small-Cap EWUS
 
With AUM of $17.6 million, this product tracks the MSCI United Kingdom Small Cap Index. In total, it has a diversified portfolio of 244 securities with none of the components holding more than 1.7% weight. From a sector look, financials takes the top spot at 24.4% while consumer discretionary, industrials, information technology and materials round off the top five. The ETF has an expense ratio of 0.59% and trades in light volume of around 7,300 shares a day. The fund gained 4.2% in the last one month (as of June 6, 2016) and has a Zacks ETF Rank #4 or ‘Sell’ rating with a Medium risk outlook.

Guggenheim CurrencyShares British Pound Sterling Trust FXB

The fund tracks the price of the British Pound Sterling. With the UK currency in a tight spot, the fund has remained broadly flat in the last 30 days (as of June 6, 2016). With AUM of $49.7 million, it is the most popular pound ETF. The ETF has an expense ratio of 0.40% and trades in volumes of around 18,000 shares a day. The fund has a Zacks ETF Rank #3 with a Medium risk outlook (read: Top and Flop Currency ETFs YTD).

iPath GBP/USD Exchange Rate ETN GBB

With AUM of $0.8 million, the fund provides exposure to the British pound/U.S. dollar exchange rate. The fund lost 0.3% in the last one month (as of June 6, 2016). The ETF has an expense ratio of 0.40% and trades in light volume of less than 1,000 shares a day and has a Zacks ETF Rank #3 with a High risk outlook (see: all Currency ETFs here).

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