British ETFs In Trouble Post Rating Downgrade, Recession Fears?

In the aftermath of last week’s referendum that approved a British exit from the European Union, credit rating agencies – Standard & Poor's and Fitch – downgraded the country's rating. While S&P lowered the nation’s rating from "AAA" to "AA”, Fitch downgraded the country from AA+ to AA. Meanwhile, Moody's has also moved UK's credit rating outlook to negative. A high credit rating helps to keep the cost of public debt low (read: UK Votes for Brexit: ETFs Winners & Losers).

Post downgrades, yields on 10-year British government bonds hit historic lows while the pound continued its descent. The currency fell to a 31-year low following Brexit, forcing the pound ETF CurrencyShares British Pound Sterling ETF (NYSE:FXB) FXB to shed 8.4% on June 24, 2016. The fund continued to plunge on the subsequent trading session on Jun 27 (read: British Pound ETF: Time to Buy?).

Recession Looming

There is no historic precedent to Brexit. It is widely believed that the referendum will have a negative impact on Britain’s GDP and the country might as well sink into recession. Goldman Sachs (NYSE:GS) has issued a pessimistic prediction that Brexit would lead the economy to dip into a mild recession in 2017. Speculation regarding the extent of deterioration of U.K.’s terms of trade with other EU countries is one of the key reasons for a potential recession (read: Brexit Shocker Forces These European ETFs Over 10% Lower).

Prior to the vote, the Treasury came out with a long-term economic analysis. The report had said that a potential exit from the EU would reduce Britain’s GDP by 6.2% in 2030.The Treasury’s warnings confirmed several market participants’ belief that a Brexit would lead to a weaker currency owing to worries about Britain's £229 billion annual trade with the EU, which could suffer if new trade barriers are raised. One of the major advantages of the EU is free trade between member nations, which makes exporting goods to other EU countries easier and cheaper for British companies. So, Brexit could have a negative impact on Britain’s GDP. Lower GDP growth and tougher export conditions would hit several sectors like retail and financial services among others and therefore have an unfavorable impact on British equities.

With the global markets having already lost trillions of dollars post Brexit vote and volatility apprehended to rule the markets in the coming days, we highlight three ETFs that are primarily exposed to British equities, which are likely to be on investors’ radar in the coming days (see: all the European Equity ETFs here).

iShares MSCI United Kingdom ETF EWU

This product tracks the MSCI United Kingdom Index. In total, it holds 114 securities with more than 40% of its assets allocated to the top 10 holdings. EWU is popular and actively traded with AUM of $1.9 billion and average daily volume of more than 4.7 million shares. From a sector look, consumer staples takes the top spot at 20 % while financials, energy, consumer discretionary, and health care round off the top five. The ETF charges 48 bps in annual fees. It has a Zacks ETF Rank #3 or ‘Hold’ rating with a Medium risk outlook. The fund has lost 11.7% in the last one week (as of June 27, 2016).

First Trust United Kingdom AlphaDEX ETF FKU

This fund provides exposure to 74 firms by tracking the NASDAQ AlphaDEX United Kingdom Index. The fund has amassed $128.4 million in its asset base while it has an average daily volume of more than 35,000 shares. None of the firms accounts for more than 2.8% of the total assets.

Sector-wise, financials takes the top spot at about 29% share while consumer discretionary, industrials and information technology also have double-digit allocation. FKU charges a fee of 80 bps annually and has a Zacks ETF Rank #3 with a Medium risk outlook. The fund is down 22.2% in the last one week (read: Beat Brexit-Induced Sell-Off via These Inverse ETFs).

iShares MSCI United Kingdom Small-Cap EWUS

With AUM of $11.8 million, this product tracks the MSCI United Kingdom Small Cap Index. In total, it has a diversified portfolio of 239 securities with none of the components holding more than 1.8% weight. From a sector look, financials takes the top spot at 23.8% while consumer discretionary, industrials, information technology and materials round off the top five. The ETF has an expense ratio of 0.59% and trades in light volume of around 12,000 shares a day. The fund lost 20.2% in the last one week and has a Zacks ETF Rank #4 or ‘Sell’ rating with a Medium risk outlook.

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CRYSHS-BRI PD S (FXB): ETF Research Reports

FT-UTD KINGDOM (FKU): ETF Research Reports

ISHARS-MS UK SC (EWUS): ETF Research Reports

ISHARS-UTD KING (EWU): ETF Research Reports

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