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U.K. Inflation Drops: ETFs in Focus

The Office for National Statistics (ONS) in a July 18, 2017 report said that the Consumer Price Index (CPI) growth fell to 2.6% in June 2017 compared with a near four-year high of 2.9% in May.  It was also below market expectations of 2.9%. The core inflation (excluding the impact of volatile items like food and energy) reading came in at 2.4% compared with 2.6% in May.


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. Household spending declined 0.3% year over year in the second quarter of 2017 compared with 0.9% in May.


The depreciation of sterling after the Brexit referendum had led to rising inflation as imports became costlier. 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 decline in CPI might bring some respite to the Bank of England and analysts are predicting the odds of a rate hike in August to be too low.


The primary reason behind the fall in consumer prices is being attributed to declining prices of petrol and diesel, owing to the fall in global oil prices. However, this fall in CPI is expected to be transitory and will rebound in the months to come.


Although oil prices are subdued currently, it’ll be OPEC’s top priority to materialize its cuts and stabilize prices.


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 $21.20 million and charges 49 basis points in fees per year. Financials, Consumer Staples and Energy are the top three sectors of this fund with 22.61%, 17.90% and 13.65% allocation, respectively (as of July 17, 2017). The top three holdings for EWU are HSBC Holdings PLC, British American Tobacco PLC and Royal Dutch Shell PLC, with 7.72%, 5.21% and 4.80% allocation, respectively (as of July 17, 2017).  It has returned 2.67% year to date but has lost 3.44% in the last one year (as of July 18, 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 $15.67 million and charges 48 basis points in fees per year. Consumer Staples, Energy and Financials are the top three sectors of this fund with 18.49%, 15.02% and 14.61% allocation, respectively (as of July 18, 2017). The top three holdings for the fund are Vodafone Group PLC, Royal Dutch Shell PLC and British American Tobacco PLC with 5.16%, 5.06% and 4.87% allocation, respectively (as of July 18, 2017). It has returned 1.90% year to date but has lost 5.67% in the last one year (as of July 18, 2017). DXPS currently has a Zacks ETF Rank #3 with a Medium risk outlook.


Deutsche X-trackers MSCI United Kingdom Hedged Equity ETF DBUK


This fund seeks to provide exposure to the U.K. equities while also hedging the currency risk.


The fund has AUM of $5.37 million and charges 45 basis points in fees per year. Financials, Consumer Staples and Energy are the top three sectors of this fund with 21.09%, 17.65% and 13.99% allocation, respectively (as of March 31, 2017). The top three holdings for the fund are HSBC Holdings PLC, British American Tobacco PLC and Royal Dutch Shell PLC, with 7.71%, 5.20% and 4.79% allocation, respectively (as of July 17, 2017).  It returned 4.52% year to date but has lost 9.41% in the last one year (as of July 18, 2017). DBUK currently has a Zacks ETF Rank #3 with a Medium risk outlook.


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DEUTS-XT MS UK (DBUK): ETF Research Reports
 
ISHARS-CHM UK (HEWU): ETF Research Reports
 
WISDMTR-UK HEQ (DXPS): ETF Research Reports
 
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