Pound Woes Could Be Good News For These U.K. ETFs

Over the past 12 months, the CurrencyShares British Pound Sterling Trust (Guggenheim CurrencyShares British) FXB is lower by more than 14 percent, making it one of the worst-performing developed markets currency exchange traded funds over that period.

Weak Pound, U.K. Stocks' Statuses

The weak pound is not crimping U.K. stocks. Just look at the iShares MSCI United Kingdom ETF (iShares Trust) EWU. EWU, the largest U.K. ETF trading in New York, is higher by nearly 15 percent over the past year, a feat made all the more impressive when considering EWU is not a currency hedged.

Currency Hedging

Currency hedged U.K. ETFs, such as the, iShares Currency Hedged MSCI United Kingdom ETF HEWU and the WisdomTree United Kingdom Hedged Equity Fund (WisdomTree Trust) DXPS, hedge pound weakness while providing exposure to U.K. stocks. That has proven to be a winning combination over the past year.

DXPS is higher by 34.5 percent over that stretch, better than double the returns offered by EWU. That says investors expect some marquee FTSE 100 names to benefit from pound weakness. It also says investors looking to nibble at U.K. stocks right now should consider currency hedged strategies.

Post-Brexit Strategy

Said another way, sterling's post-Brexit tumble is benefiting U.K. exporters, and that theme is accessible via ETFs like DXPS and HEWU.

Related Link: Investors Survived Brexit And Trump, Now Rewarded With Dow 20K

“That's good news for shareholders, as fatter profits allow companies to increase dividend payments. The pound's 16 percent drop since June's vote to leave the European Union largely explains the stellar stock-market performance of companies with a high foreign-exchange exposure,” according to Bloomberg.

U.S. Investors' Reactions

U.S. investors have been slow to react. While EWU lost more than $295 million in assets last year, HEWU saw annual inflow of just $65.2 million and DXPS saw minor outflows. Financial services companies are the largest sector weights in both ETFs, but the exposure to that group is lower in DXPS.

Underscoring the impressive showing recently notched by DXPS is that ETF's significant exposure to U.K. exporters, or those companies that stand to benefit from the weak pound. For example, consumer staples, energy and materials combine for over 45 percent of that ETF's roster.

The Bank of England is expected to maintain an accomodative monetary policy, meaning the path of least resistance for the pound is lower and that is good news for the likes of DXPS and HEWU.