UK ETFs In Focus As BOE Keeps Rate Unchanged

The Bank of England (BOE) decided to keep the key interest rate unchanged after concluding a two-day monetary policy committee meeting on Wednesday. The committee members voted 8-1 in favor of keeping the interest rate flat at 0.5%. It acknowledged that the China developments have increased downside risk to the global economy, but didn’t see any effect on the UK economy yet.
The committee said: "Although the downside risks emanating from overseas had risen, it would be premature to draw strong inferences from this month's events for the likely path of activity in the United Kingdom." However, the BOE reduced its outlook for third-quarter GDP growth in the UK from 0.7% to 0.6%. It blamed disappointing manufacturing and industrial production data for reducing its forecast.
When Will Rates be Raised?
There is great divergence in the monetary policy trajectory of the global central banks at present, with the U.S. Fed getting ready to start its tightening policy while every other big country’s central bank in easing mode. The Bank of England isn’t one of those other big-country central banks of course – it is, in fact, running parallel with the U.S. Fed as far as the stringency of monetary policies are concerned. Most of the market participants are predicting that the BOE will raise the interest rate in the first half of 2016. However, major international organizations including the World Bank and the International Monetary Fund warned that the rise in interest rate might have a negative impact on the respective economies in the current sluggish global growth scenario (read: Forget Greece, Buy These UK ETFs Instead).
Despite the growth outlook cut, the committee remained dovish about the UK’s economic environment. The committee stated: “Domestic momentum is being underpinned by robust real income growth, supportive credit conditions, and elevated business and consumer confidence…the rate of unemployment has fallen by over two percentage points since the middle of 2013.” Though the BOE kept the rate unchanged, the upbeat view about the economy signaled that the bank is preparing for a rate hike in the near future.
Is the Economy Really Recovering?
The UK Office for National Statistics recently reported that manufacturing production declined at an adjusted rate of 0.8% in July, compared to a rise of 0.2% in the previous month. Most of the manufacturing sub-sectors witnessed a decline in production during July. It was also reported that industrial production dropped at a seasonally adjusted rate of 0.4% in July, preceded by a decrease of 0.4% in June. Separately, the BOE projected that consumer price inflation will rise at a 2% rate over the next 12-month period, down from the previous estimate of a 2.2% rise (read: Can UK ETFs Continue their Uptrend?).
Meanwhile, a separate report showed that export in July declined more than 9%, widening the trade deficit of goods to the highest level in the last one year. It was also witnessed that export volume to nations that are not part of the EU declined at a faster rate, compared to the same to the EU members. This indicated that sluggish growth condition in emerging economies, which resulted in declining demand, probably had a negative impact on UK’s export volume. These dismal economic data raised doubt about the economic health of the country.
ETFs in Focus
Apart from the U.S., the UK is the only major economy which is preparing for a rate hike in the upcoming months. However, it is speculated that the pace of economic recovery in the UK will play an important part in the rate hike decision. In this scenario, we highlight three ETFs that are primarily exposed to British equities and are thus likely to be on investors’ radar in the coming days (see: all the European Equity ETFs here).
iShares MSCI United Kingdom ETF (EWU - ETF report)
This product tracks the MSCI United Kingdom Index. In total, it holds 112 securities with nearly 37% of its assets allocated to the top 10 holdings. EWU is popular and actively traded with AUM of $2.7 billion and average daily volume of more than 3 million shares. From a sector look, financials takes the top spot at 23.5% while consumer staples, energy, consumer discretionary, and health care round off the top five. The ETF charges 48 bps in annual fees. It has a Zacks Rank #2 (Buy) with a Medium risk outlook and gained 1.7% over the past week.
First Trust United Kingdom AlphaDEX ETF (FKU - ETF report)
This fund provides exposure to 75 firms by tracking the Nasdaq AlphaDEX United Kingdom Index. The fund has amassed $239.8 million in its asset base while it has an average daily volume of more than 100,000 shares. None of the firms accounts for more than 2.6% of the total assets.
Sector-wise, consumer discretionary takes the top spot at about 32.1% share while financials and industrials also have double-digit allocation. FKU charges a fee of 80 bps annually and has a Zacks Rank #2 (Buy) with a Medium risk outlook. The fund has returned 1.2% over the past week (read: What Makes This New UK ETF Different from Others?).
iShares MSCI United Kingdom Small-Cap (EWUS - ETF report)
With AUM of $16.4 million, this product tracks the MSCI United Kingdom Small Cap Index. In total, it has a diversified portfolio of 238 securities with only 14.3% of its assets allocated to the top 10 holdings. From a sector look, financials takes the top spot at 24.6% while consumer discretionary, industrials, information technology and health care round off the top five. The ETF has an expense ratio of 0.59% and trades in light volume of around 3,000 shares a day. The fund has returned 1.5% over the past week.

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