U.K. Prime Minister Theresa May will be filing divorce papers to leave the European Union (EU) on March 29 – the first step of two years of negotiations to ensure a smooth exit from the union. May has said that she wants to get the best possible deal for her people, including a good free-trade pact with the EU. However, the EU will not be making it that easy for May, as it works to safeguard the interests of the 27 remaining member states and ensure that exit does not benefit U.K. (read: Brexit: Still a Thing).

 

The question is whether Britain, the sixth biggest economy in the world, can retain its status of the region’s financial center and maintain trade relationships with its largest market (read: How Hard will Brexit be on UK and Pound ETFs). 

 

The 310-year old relationship with Scotland is also in question as First Minister Nicola Sturgeon fights for an independence referendum. Although May has blocked the referendum until Brexit terms are entirely known, there is increasing uncertainty regarding the future of the union between these countries as Sturgeon's rationale seems to be gaining support. As per May’s plan, the referendum will not be able to take place before the end of 2020, as it will take at least another 18 months to prepare post-Brexit. By then, Scotland will have to prepare to leave the U.K and join the EU (read: Will Talks of Scottish Independence Vote Hurt British ETFs?). 

 

European Commission spokesman Margaritis Schinas said that the EU is ready to begin negotiations. This led to a 0.4% decline in the pound to $1.2348 at 4.32 p.m. in London on March 20.

 

In the wake of the high uncertainty regarding the future of the U.K. and a bleak outlook for the pound, we have eyes on the following currency hedged ETFs:

 

iShares Currency Hedged MSCI United Kingdom ETF

 

This fund has over 80% exposure to the U.K. For investors looking to gain higher exposure to the British markets in particular, this fund is one of the most appropriate pure play options available.

 

The fund manages AUM of $83 million and charges 48 basis points (bps) in fees per year. Financials, Consumer Non-Cyclical, and Energy are the top three sectors of this fund with over 50% of fund assets allocated to them. The fund has an average volume of 41,000 shares. It returned 6.01% in the year-to-date timeframe and 24.61% in the past one year. HEWU currently has a Zacks Rank #3 (Hold) with a Medium risk outlook.

 

WisdomTree United Kingdom Hedged Equity Fund

 

This fund has over 80% exposure to the U.K. For investors looking to gain higher exposure to U.K. dividend paying companies with an export tilt, this fund is an appropriate bet.

 

The fund manages AUM of $20 million and charges 48 bps in fees per year. Financials, Consumer Non-Cyclical, and Energy are the top three sectors of this fund with over 50% of fund assets allocated to them. The fund has an average volume of 4,500 shares. It returned 6.09% year to date and 25.80% in the past one year. DXPS currently has a Zacks Rank #3 with a Medium risk outlook.

 

Deutsche X-trackers MSCI United Kingdom Hedged Equity ETF

 

With over 80% exposure to the U.K., this fund is a relatively less popular currency hedged ETF available in the region.

 

The fund manages AUM of $5.4 million and charges 45 bps in fees per year. Financials, Consumer Non-Cyclical, and Energy are the top three sectors of this fund with over 50% of fund assets allocated to them. The fund has an average volume of 1,810 shares. It returned 5.77% in the year-to-date timeframe and 23.40% in the last one year. DBUK currently has a Zacks Rank #3 with a Medium risk outlook.

 

 

With Article 50 about to be triggered, there is high uncertainty regarding the terms U.K. will have to abide by relating to Brexit. The pound is losing ground amid Brexit concerns and it is difficult to predict the future of the currency. As a result, we believe it’s best to remain on the sidelines for now.

 

 

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