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U.K. ETFs in Focus on Lower GDP Growth Forecasts

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The European Commission revised its forecast for U.K. GDP growth to 1.5% for 2017 from 1.8% predicted earlier. Moreover, the commission expects GDP growth to fall to 1.3% in 2018 and 1.1% in 2019, as mounting concerns related to a hard Brexit weigh on the economic prospects of the region.


Economic Scenario


In the third quarter, U.K.’s GDP grew 0.4% sequentially and 1.5% year over year. Although this reflects a slight increase from 0.3% sequential growth in the second quarter, the rate of improvement has been dismal since Brexit and lags the overall Euro zone. The Commission increased its forecast for Euro zone growth to 2.2% in 2017 from its previous estimate of 1.7%.


U.K. consumer price index increased 3% year over year in September compared with 2.9% in August, per data released by the Office for National Statistics.


Earlier this month, Bank of England (BOE) hiked its benchmark interest rate by 25 basis points to 0.5%. Despite relatively weak growth, this is the first time that the central bank has hiked the interest rate for since July 2007 in order to curb inflation.


The British economy has been suffering since the Brexit referendum as a falling sterling has made imports costlier and compounded consumer woes. Moreover, wages in the United Kingdom are not increasing as fast as inflation. It grew 2.4% in October, as a result of which consumers are witnessing a rise in costs in real terms. This, in turn, is weighing on consumer spending in the U.K, one of the factors cited by the commission behind the weaker GDP growth expectations.


Central Bank Estimates Differ


The Commission also expects weak investment growth in the future, as companies seek other investment options in order to avoid uncertainty. Moreover, the contribution of exports to GDP growth has been weak despite the fall in sterling.


The projections of the Commission are similar to that of the Organization for Economic Cooperation and Development (OECD). OECD expects U.K. GDP to grow 1.6% this year and 1% in 2018. The Bank of England expects GDP to grow 1.6% in 2017 and 2018 before increasing to 1.9% in 2019.


The primary reason for this difference is that the central bank is pricing in a smooth Brexit deal, while the OECD expects issues in trade agreements that may adversely impact growth.


 Let us now discuss a few currency hedged ETFs providing exposure to the United Kingdom (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 $15.7 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 15.8% allocation, respectively (as of Nov 8, 2017). The top three holdings of EWU are HSBC Holdings PLC, British American Tobacco PLC and Royal Dutch Shell PLC, with 7.5%, 5.8% and 5.6% allocation, respectively (as of Nov 8, 2017).  It has returned 6.5% year to date but has lost 1% in a year (as of Nov 9, 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 17.9%, 17.5% and 14.0% allocation, respectively (as of Nov 9, 2017). The top three holdings of the fund are Royal Dutch Shell PLC Class A, Royal Dutch Shell PLC Class B and BP PLC with 5.9%, 5.8% and 5.6% allocation, respectively (as of Nov 9, 2017). It has returned 4.2% year to date but has lost 3.5% in a year (as of Nov 9, 2017). DXPS currently has a Zacks ETF Rank #3 with a Medium risk outlook.


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