The results of the Jun 23 referendum are out and Britain has decided to leave the Europe Union (EU), with the ‘leave’ camp gaining 51.9% Briton’s support.
The Britain-EU divorce is sure to unsettle the market momentum as it will have sweeping impacts on the global economy.Investors should note that the final voting outcome defied all poll results released this week in which chances of a ‘Bremain’ were higher than ‘Brexit’. As a result, a market crash is well-expected as the unprecedented event is not priced in at the current level.
Negative Repercussions of Brexit
Post Brexit, Britain will be able to set its own trade agreements with the rest of the world, but will lose the benefits of free trade within the EU countries. Since EU shares an intense trade relation with Britain, the levy of new trade barriers may hurt the country’s economy.
As per the UK government data, this break-up will lead the British economy to contract by 3.8% to 7.5% by 2030. Some are of the view that Brexit would hit the low-income strata as lower national income would result in reduction of the welfare budget. Also, waning trade relations with the EU will hurt the country’s job market. British currency pound has already dived to a three-decade low against the greenback, reacting to the Brexit decision.
Positive Possibilities of Brexit
Post break-up, Britain will get rid of the sensitive immigrant issue. At the current level, the UK has no control over accepting migrants as citizens of EU members have the permission to reside in any member country.
Britain is incurring a net £3 million in cost every day due to surging EU migration. However, there is a report which says that EU immigrants added more to the UK economy in the form of tax payments than they received in public benefits.
Britain will save a considerable amount that it shells out as membership fee if it cuts ties with the EU. Also, Britain will no longer have to bear the brunt of EU’s debt crisis related hazards (read: British ETFs in Focus as Brexit Debate Flares Up).
How Will ETF Markets React?
Needless to say, panic-induced sell-offs over the next few days will compel investors to rush to safe havens. While all risky assets are likely to go berserk in the key trading session following the Brexit, below we highlight a few ETFs that are likely to benefit or lose the most, responding to the event. Notably, the three big U.S. ETFs, (SPY - Free Report) , (DIA - Free Report) and (QQQ - Free Report) shed about 3.7%, 2.6% and 3.6% in the pre-market session on June 24.
UK–iShares MSCI United Kingdom EWU
The wrath of the event will likely be felt the most in the concerned country. EWU lost over 11.2% in the pre-market session on June 24, 2016 and is on its way to a heavier slide.
Pound Sterling – CurrencyShares British Pound Sterling ETF (FXB - Free Report)
At the time of writing, the British currency ETF lost about 6.5% in the pre-market session on June 24 and will likely be thrashed once the market opens.
Europe Financials– iShares MSCI Europe Financials (EUFN - Free Report)
As soon as Britain cuts the cord with the EU, its importance as a corporate transit to the rest of Europe would be lost, going by an article in CNBC. Many global institutions may even want to shift their base from London to the German capital Frankfurt – another hot spot in the European Union.
While the Europe financials stocks and ETFs will be the direct underdogs, other financial ETFs like iShares U.S. Financial Services ETF (IYG) and Financial Select Sector SPDR (XLF) will be hurt in the coming sessions. XLF lost about 5.4% in the pre-market session.
Europe– Vanguard FTSE Europe ETF VGK
Triggered by the banking sector massacre, European stocksare on their way to the ‘biggest ever one-day percentage fall’.
Emerging Market– iShares MSCI Emerging Markets (EEM - Free Report)
Though the emerging markets are not that exposed to British shocks, just ripple effects of the negative sentiments led EEM to lose over 6% in the pre-market session (read: Bremain or Brexit: No Worries for EM ETF Investing).
Volatility– iPath S&P 500 VIX ST Futures ETN (VXX - Free Report)
Since the broader market will go into a tailspin, volatility ETFs will be on a tear in the upcoming trading sessions. In pre-market session, VXX surged about 24.3%.
U.S. Treasury– iShares 20+ Year Treasury Bond (TLT - Free Report)
As part of the risk-off trade sentiments, the long-term U.S. Treasury bond ETF gained over 3.2% in the pre-market session (read: Safe Haven ETFs Surge on Brexit Fears).
Gold– SPDR Gold Shares (GLD - Free Report)
Another safe-haven asset, gold, is also on a high-flying mode post Brexit decision. GLD tacked on about 4.9% gains in the pre-market session.
Yen– CurrencyShares Japanese Yen ETF (FXY - Free Report)
Yet another safe-haven currency yen touched its two-year high on Brexit.
Low Volatility + Dividend– PowerShares S&P 500 High Dividend Low Volatility Portfolio ETF (SPHD - Free Report)
The last but not the least choice is Legg Mason Low Volatility High Dividend ETF (LVHD - Free Report) .
The turmoil will likely boost low-volatility investing overall. Here, our picks focus on the U.S. market, rules out the high-tension Europe zone and yield decently. A low volatility high-dividend approach would go a long way in protecting investors’ total return in turbulent times.
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