ETFs investing in UK equities are down 2.9% over the last month after the fall of Sterling currency, lower-than-expected inflation data and the Bank of England’s hesitation to raise interest rates one year after Brexit.
Year to date, UK-focused ETFs are only down 0.18%, but have lost more than $1 billion in assets.
Over one year, they have bled more than $9 billion as the Government has gone back and forth over Brexit and has faced a series of terrorist and cyber attacks.
In the meantime the Bank of England is closely monitoring whether it should raise rates.
On 15 August the Office for National Statistics reported that the UK Consumer Price Index growth remained steady at 2.6% in July, compared to an almost four-year high of 2.9% in May, but it fell below market expectations.
UK inflation rising above 2% target
The Bank of England expects inflation to rise to a five-year high of 3% by October this year, and has marked up its estimate of full-year inflation in 2017 from 2.6% to 2.7%. But the ONS report also agreed that the economy is not yet ready for a rate hike, due to uncertainty around Brexit negotiations.
A slew of negative economic data, including a decline of consumer spending by 0.8% year over year in July, and a squeeze in UK workers’ pay, has also contributed to the fall in value of Sterling.
Falling Sterling since Brexit
The currency has sunk more than 14% since the Brexit referendum, which has resulted in rising inflation as imports become more expensive. The BoE was therefore under pressure to raise rates, but recent inflation data has eased that pressure.
Earlier in August, just two out of eight members of the Monetary Policy Committee favoured a rate hike and the committee is not expected to change its stance next month.
UK ETF options
For US investors looking for UK exposure, there are two important funds to consider. The iShares Currency Hedged MSCI United Kingdom ETF (HEWU) is one of the most popular options.
It has almost $19 million in assets and costs 0.49%. Its top three sectors, which account for more than 50% of the fund, are financials, consumer staples and energy. Over one year HEWU is up more than 11% but has shed around $45 million.
Another currency-hedged option is the WisdomTree United Kingdom Hedged Equity Fund (DXPS) which invests in exporting companies that pay dividends.
It costs 0.48% per year and has the same top three sectors. The fund has returned around 10.6% over 12 months but has lost more than $10 million in assets.