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U.K. Inflation on the Rise: ETFs in Focus

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U.K. consumer price index increased 3.0% year over year in September compared with 2.9% in August, per data released by the Office for National Statistics. Data released for September matched the increase in April 2012.


Core inflation, which excludes volatile items such as food and energy, increased 2.7% in the month. The increase was same as the previous month but at its highest since December 2011.


The primary drivers of inflation growth in August were essentials such as transport and food prices, biting into consumers’ daily lives as they pay higher costs for necessities.


Rate Hike in the Cards?


The recent increase in inflation is expected to create pressure on the BOE to hike rates as a falling sterling due to Brexit uncertainties continues to drive up inflation. A falling sterling makes imports costlier for the British (read: U.K. Retail Sales Exceeds Expectations: ETFs in Focus).


Bank of England (BOE) officials expect the inflation to further increase in the coming months and stated that such a situation might prompt the committee to hike rates sooner than expected by the markets.


Inflation and GDP Paradox


Wages in the United Kingdom are not increasing as fast as inflation. It grew 2.1% in the three months to August and thus consumers are witnessing a rise in costs in real terms.


In the second quarter, U.K. GDP grew 0.3% sequentially and 1.7% year over year. Although this reflects a slight increase from 0.2% sequential growth in the first quarter, the rate of improvement has been dismal since Brexit. Moreover, a rate hike will impact innumerable mortgage holders and might harm economic activity, thereby leading to a further decline in the GDP.


However, investors are expecting that BOE’s top agenda will be to control inflation given that the reading reached 3% last month. As a result, BOE officials are expected to increase rates for the first time in 10 years from the current low of 0.25%, when they meet next to decide on the monetary policy on Nov 2.


Let us now discuss a few currency hedged ETFs focused on providing exposure to the U.K. (see all European Equity ETFs here).


iShares Currency Hedged MSCI United Kingdom ETF (HEWU - Free Report)


For those looking to gain exposure to the British markets in particular, this fund is one of the most popular pure play options available. It seeks to maintain equity exposure to its un-hedged version EWU, while hedging away currency fluctuations between the dollar and the British pound.


The fund has AUM of $15.8 million and charges 49 basis points in fees per year. Financials, Consumer Staples and Energy are the top three sectors of this fund with 21.3%, 17.7% and 14.6% allocation, respectively (as of Oct 16, 2017). The top three holdings for EWU are HSBC Holdings PLC, British American Tobacco PLC and Royal Dutch Shell PLC, with 7.6%, 5.7% and 5.2% allocation, respectively (as of Oct 16, 2017).  It has returned 7.2% year to date but has lost 5.5% in a year (as of Oct 17, 2017). HEWU currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.


WisdomTree United Kingdom Hedged Equity Fund (DXPS - Free Report)


This fund seeks to provide exposure to the U.K. dividend paying companies with an export tilt, while also hedging the currency risk.


The fund has AUM of $14.6 million and charges 48 basis points in fees per year. Consumer Staples, Energy and Financials are the top three sectors of this fund with 18.1%, 16.6% and 14.1% allocation, respectively (as of Oct 17, 2017). The top three holdings for the fund are Royal Dutch Shell PLC Class A, Royal Dutch Shell PLC Class B and BP PLC with 5.6%, 5.4% and 5.4% allocation, respectively (as of Oct 17, 2017). It has returned 4.9% year to date but has lost 8.7% in a year (as of Oct 17, 2017). DXPS currently has a Zacks ETF Rank #3 with a Medium risk outlook.


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