Brexit Still Hangs Over U.K. ETFs

Considering all the controversy surrounding Great Britain's departure from the European Union, British stocks have been decent performers. Over the past year, the iShares MSCI United Kingdom ETF EWU, the largest U.K. exchange-traded fund trading in the United States, is higher by 4.8 percent.

Early Election Impact

Still, U.K. stocks did not react well to news out earlier this week that British Prime Minister Theresa May surprisingly called for early elections in June. Those headlines sent the FTSE 100, the benchmark gauge of U.K. equities, tumbling by 2.5 percent.

“UK-related ETFs listed here in the U.S. reflected the lower prices, but the decline was mitigated to about 1 percent for major funds like the iShares MSCI United Kingdom ETF, thanks to the surging GBP. Meanwhile the WisdomTree U.K. Hedged Equity ETF was down around 2 percent today, since the currency hedge negated the benefit of today’s move in the Pound,” said AltaVista Research in a note out Tuesday.

The Pound And Brexit

The pound suffered in the wake of Brexit and was one of 2016's worst-performing developed market currencies, which made the WisdomTree United Kingdom Hedged Equity Fund DXPS a leader among U.K. ETFs. DXPS is up 16 percent over the past year, or better than triple the returns offered by the unhedged EWU.

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.

Expectations

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

The U.K.'s general election is slated for June 8, and it is expected the country and the EU will move forward with Brexit negotiations after that election.

Brexit remains a cloud over U.K. stocks. Over the trailing 12 months, EWU has trailed the MSCI EAFE Index by 340 basis points and the S&P Europe 350 Index by 190 basis points. The U.K. is the largest country weight in the S&P Europe 350 Index and the second-largest country allocation in the MSCI EAFE Index.