How Brexit Affects The Ireland ETF

The iShares MSCI Ireland ETF EIRL, the lone U.S.-listed exchange traded fund dedicated to Irish equities, is up 6.34 percent year-to-date, an impressive performance considering the Brexit backdrop.

With the U.K.'s departure from the European Union looming, some analysts and market observers are assessing the potential impact of Brexit on Irish equities.

What Happened

EIRL, which turns nine years old in May, follows the MSCI All Ireland Capped Index and holds 27 stocks. There are concerns that if the U.K. withdraws from the EU without trade agreements in place, including one with Ireland, geopolitical relationships could be damaged.

Prime Minister Teresa May's recently defeated Brexit agreement included a trade accord with Ireland, but that deal is no longer in play.

“But since that framework is no longer on the table, customs checks will be implemented between the Irish neighbors when Britain leaves the E.U. on March 29 — unless May and British lawmakers delay that deadline or decide on an alternative withdrawal strategy,” according to CNBC.

Why It's Important

As is to be expected, some Irish sectors are more exposed to Brexit than others and there has been a sharp divergence between the least and most exposed sectors.

“A recovery in output enjoyed by firms most exposed to Brexit in 2017 largely failed to continue last year, with the gap in performance between the 'most exposed' and 'least exposed' sectors becoming much larger, especially in late-2018,” IHS Markit said in a recent note.

EIRL's two largest sector weights are almost evenly split between cyclical and defensive groups. The fund's largest sector allocation is materials at almost 28 percent followed by defensive consumer staples at 26.61 percent.

“Although greater than normal, the recent underperformance of the 'most exposed' sectors has not been as great as the period immediately following the UK's 2016 referendum,” said Markit. “This could be due to efforts by companies to prepare for Brexit, such as by reducing any reliance on UK business.”

What's Next

While Ireland is generally seen as prepared for Brexit, investors may need some convincing regarding EIRL. After seeing outflows of $4.32 million last year, the Ireland ETF has not taken in any new assets this year.

“The Irish government has released guidelines and undergone detailed preparations for Brexit. The state economic development agency focused on generating export sales (Enterprise Ireland) has a designated webpage for Irish firms seeking information on Brexit,” according to Markit.

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