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UK ETFs in Focus as Prime Minister Postpones Brexit Voting

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The most popular U.K. ETF, iShares MSCI United Kingdom ETF (EWU - Free Report) declined by 1.2% on Dec 10 after prime minister Theresa May postponed the significant vote on her Brexit deal, which was set to take place on Dec 11. Sterling hit its lowest level in 18 months. 

May said that she has opted to delay the vote on the withdrawal agreement rather than facing a severe loss in the Parliament, since the loss in voting could threaten the Brexit deal and her political survival. In doing so, May stretched her tenure long enough to have another round of talks with the European negotiators.  

The prime minister believed that the best possible deal was struck by her. However, May will return again to Brussels this week to do all she can to secure the reassurances the House requires to get this deal over the line and deliver for the British people.

Trade difficulties, problems in attracting talented people and increased cost of living are being cited as the possible oppositions to the Brexit deal. Some opponents against the deal want May to win stronger commitments with regard to free trade agreements with EU, release Britain from EU courts and stop payments of an agreed £39 billion "divorce bill (read: Brexit Draft Deal Makes These Sector ETFs a Must-See).”

Northern Irish Backstop

Though May claimed that deal had a broad consensus to be the right one, the issue of the Northern Irish backstop was an area of concern. According to this arrangement, no hard border will be erected between Northern Ireland and the Republic of Ireland even if no formal Brexit deal can be reached. This implies that Northern Ireland could stay in the customs union and select parts of European Union’s (EU) single market, resulting in a friction-free border with the Republic of Ireland.

However, this arrangement is being opposed by lawmakers of different parties. They fear that in the absence of an agreed time limit or a unilateral right by the U.K. to end the clause, this arrangement could be leveraged to keep the whole of the U.K. under EU rules unless Brussels decides otherwise. The lawmakers will continue to oppose the deal until May either removes the backstop or put a time limit to its effectiveness.

What Lies Ahead?

European Council president Donald Tusk wrote on Twitter that there will be no negotiations on the deal, including the backstop but the council is ready to discuss how to facilitate the U.K. ratification. He added a likely scenario of a no-deal Brexit would also be considered given the looming deadline date. So, it is unlikely that May would return to the parliament with anything that’s significantly different from the already negotiated deal.

Britain is set to officially exit the European Union, deal or no deal, on March 29, 2019 — just a little over three months away.   

ETFs in Focus

Below we highlight EWU and Invesco CurrencyShares British Pound Sterling Trust (FXB - Free Report) in detail. EWU and FXB have been performing poorly in the past four weeks, losing 5.8% and 2.3%, respectively (as of Dec 10) given the uncertainty surrounding Britain’s divorce deal (see: all the European Equity ETFs here):

EWU

The fund tracks the MSCI United Kingdom Index providing exposure to large and mid-sized companies. It comprises 98 holdings. Sector wise, Financials (19.6%), Energy (17.5%), Consumer Staples (16.4%) and Health Care (11.9%) have double-digit weights. The funds’ AUM is $1.8 billion and expense ratio is 0.49%.

FXB

The fund offers exposure to the British pound relative to the U.S. dollar. It has AUM of $136.4 million and expense ratio of 0.4% (read: Is the Uptrend in Dollar ETFs Over?).

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