UK Manufacturing Output Shrinks : ETFs In Focus

UK manufacturing output shrank to a five and a half year low in April, falling by 1.4%. This marked its consecutive fall for three months. Primarily, the underperformance of electrical machinery and steel used in infrastructure is responsible for this weak performance.

Economic Data

After the disappointing performance was revealed, pound slipped 35 basis points against the dollar at $1.34, and 0.5% against the Euro at €1.13 on Jun 11. Construction output was also weaker than expected, growing by just 0.5%. Notably, construction orders fell by 3.4% in the first quarter of 2018, which is the second consecutive fall after a decline in the last quarter of 2017. This is the biggest decline since August 2012 (read: Why These UK ETFs & Stocks Deserve to be in Your Portfolio).

Nine out of 13 manufacturing sectors saw output decline in April, led by metals and transport equipment. Subdued retail sector conditions, weaker demand and low consumer spending have resulted in the slowdown. Rise in utility bills, and council tax is expected to increase the government revenue to a large extent.

What Lies Ahead?

Confederation of British Industry (CBI) has cut the GDP growth forecast to 1.4% in 2018 and a further drop in 2019 to 1.3%. Brexit, expected to be completed by March 2019, has reduced investor confidence and declined business growth. Shortage of raw materials, higher fuel prices and labor costs are putting the private sector under pressure.

As the UK economy slows down, let’s look at the ETFs exposed to the region.

iShares MSCI United Kingdom ETF (EWU)

The fund tracks the results of MSCI United Kingdom Index. It has AUM of $2 billion and charges an annual fee of 49 basis points. The fund has 101 holdings in its basket and trades an average daily volume of 2.35 million shares. HSBC, Royal Dutch Shell (LON:RDSa) and BP plc (LON:BP) are the prominent individual stocks with none holding more than 8%. As for sector outlook Financials, Energy and Consumer Staples are the top three with weights of 21.3%, 17.3% and 16%, respectively. The fund has Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: Will Royal Wedding Truly Boost UK Economy in Q2? ETFs in Focus).

iShares MSCI United Kingdom Small-Cap ETF (EWUS)

The fund tracks investment results of the MSCI United Kingdom Small Cap Index. The fund controls assets of $22.8 million with annual fees of 0.59%. It is composed of 274 stocks with an average daily traded volume of 5820 shares. Informa, Rentokil Initial and Smith plc are the top three stocks with none controlling more than 2%. In terms of sector holdings Consumer Discretionary, Industrials and Financials has the biggest exposure with weights of 22.4%, 19.25 and 15.6%, respectively. The fund has Zacks ETF Rank #3 with a Medium risk outlook.

SPDR MSCI United Kingdom StrategicFactors (NYSE:QGBR) ETF (QGBR)

The fund tracks the performance of MSCI UK Factor Mix A-Series Capped Index. It has an asset base of $21.6 million and expense ratio of 0.30%. Diageo (LON:DGE), AstraZeneca and HSBC comprise the top individual holdings with none holding more than 6%. The fund has average daily volume of shares traded at 4620. As far sector exposure is concerned, Consumer Staples, Financials and Consumer Discretionary comprise the top three with weights of 19%, 18% and 12.8%, respectively. The fund has Zacks ETF Rank #3 with a High risk outlook.

First Trust United Kingdom AlphaDEX Fund (FKU)

The investment objective of the fund is to track the NASDAQ AlphaDEX United Kingdom Index. Expense ratio is 0.80% and it assets under management is worth $12.8 million. This fund has 74 holdings and a daily traded volume of 3540 shares. Ocado (LON:OCDO), Evraz and Babcock are the top individual stocks with none holding more than 6%. Consumer Discretionary, Industrials and Materials are the top sector exposures with holdings of 27.8%, 18% and 17.3%, respectively. The fund has Zacks ETF Rank #3 with a Medium risk outlook(read: 5 Hottest Small-Cap ETFs of 2018).

Franklin FTSE United Kingdom ETF (FLGB)

The fund tracks the investment results of FTSE UK RIC Capped Index. It has a nominal expense of 9 basis points annually. The fund consists of 134 stocks and has an asset base of $2.6 million. HSBC, Royal Dutch Shell and BP plc are the prominent individual stocks with none holding more than 8%. It trades an average daily volume of 1760 shares. Financials, Energy and Consumer Staples are the main sector allocations with weights of 20.3%, 16% and 14.9%, respectively.

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