U.K. Inflation Unexpectedly Steady: ETFs In Focus

The Office for National Statistics (ONS) in an August 15, 2017 report said that the U.K.’s Consumer Price Index (CPI) growth remained steady at 2.6% in July 2017 compared with a near four-year high of 2.9% in May. It was also below market expectations of 2.7%. The core inflation (excluding the impact of volatile items like food and energy) reading also remained steady at 2.4%.

Per ONS, declining fuel prices were offset by price rises in the utilities, food and clothing sectors. Per Bank of England, inflation is expected to adopt a rising trajectory and hit a five-year high of 3% in October. It increased its full-year 2017 inflation forecast to 2.7% from the previous estimate of 2.6%.

This report is supportive of the fact that the economy is currently not stable enough to sustain a rate hike. The high uncertainty around the potential impact of Brexit negotiations demand the stimulus measures to continue.

However, the pay squeeze for British workers continued. Per Business Insider, in the second quarter, total pay, including bonuses, declined 0.7% after taking inflation into account. Consumer spending declined 0.8% year over year in July 2017 compared with 0.2% in June.

This news release caused the sterling to decline. The depreciation of sterling since the Brexit referendum had led to rising inflation as imports became costlier. Per Reuters, the sterling has declined over 14% since the Brexit referendum last year.

This, therefore, created pressure on the central bank to put possible rate hikes on the table in order to curb the ever-expanding inflation measure (read: UK Consumer Spending and Industrial Output Decline: ETFs in Focus).

However, the recent CPI data might bring some respite to the Bank of England and analysts are predicting the odds of a rate hike in the near term to be too low. Earlier this month, two out of eight members of the rate-setting Monetary Policy Committee favored a rate hike. Following the recent inflation data, other members are less likely to change their stance in the next meeting and therefore interest rates are widely expected to remain steady.

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

iShares Currency Hedged MSCI United Kingdom ETF HEWU

For investors 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 (read: Theresa May Spends 1B Pounds to Keep Majority: ETFs in Focus).

The fund has AUM of $18.96 million and charges 49 basis points in fees per year. Financials, Consumer Staples and Energy are the top three sectors of this fund with 22.02%, 18.29% and 13.69% allocation, respectively (as of August 14, 2017). The top three holdings for EWU are HSBC Holdings (LON:HSBA) PLC, British American Tobacco (LON:BATS) PLC and Royal Dutch Shell (LON:RDSa) PLC, with 7.70%, 5.81% and 4.93% allocation, respectively (as of August 14, 2017). It has returned 3.36% year to date but has lost 5.92% in the last one year (as of August 15, 2017). HEWU currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

WisdomTree United Kingdom Hedged Equity Fund DXPS

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 $14.51 million and charges 48 basis points in fees per year. Consumer Staples, Energy and Financials are the top three sectors of this fund with 18.43%, 15.46% and 14.88% allocation, respectively (as of August 15, 2017). The top three holdings for the fund are Royal Dutch Shell PLC Class B, Vodafone Group PLC (LON:VOD) and Royal Dutch Shell PLC Class A with 5.37%, 5.25% and 5.06% allocation, respectively (as of August 15, 2017). It has returned 2.32% year to date but has lost 9.15% in the last one year (as of August 15, 2017). DXPS currently has a Zacks ETF Rank #3 with a Medium risk outlook.

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