Brexit could present opportunities in currency-hedged UK equity ETFs

Apr 19th, 2016 | By | Category: Equities

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The latest YouGov poll on so-called Brexit, the UK’s EU Referendum, has found the race continues to be a close-run contest, with 40% of voters electing to stay “in”, 39% wanting “out” of Europe, and 16% undecided on which way they should vote.

WisdomTree Europe lays out strategy for ETF investors ahead of Britain’s EU Referendum

“Brexit” could mean opportunity in currency-hedged UK equity ETFs

In the run up to 23rd June’s so-called “Brexit” vote most polls suggest Britons will remain in the EU – propelled by David Cameron’s acquiring of the UK’s “special status” – but the result is by no means guaranteed (investors have not forgotten how wrong the polls were in the last General Election).

However, while the ongoing uncertainty could also spell further weakness for Sterling – the GBP versus Euro has slipped nearly 6% since the start of the year from €1.35 to €1.27 today [19th April] – there could be opportunities in currency-hedged UK equity ETFs.

WisdomTree Europe has referenced the Greek referendum on EU membership as a proxy for the likely market performance leading up to the ‘Brexit’ referendum on 23 June. While the FTSE 100 and EURO STOXX 50 indexes fell by about 6% in the month before the Greek referendum, safe haven assets such as German Bunds performed quite well.

This could mean bad news for UK equity investors who were celebrating the FTSE 100’s 2016-high on 20 April of 6410 points, after recovering 837 points from its year-low on 11 February.

The iShares FTSE 250 UCITS ETF (MIDD) is down more than 2.8% year to date in sterling terms, and bad news for its companies lies ahead. According to a study from the Chartered Institute of Internal Auditors, three quarters of the UK’s FTSE 250 companies have not carried out proper planning for a possible Brexit with the chairman of the audit committee or the chairman of the board.

To protect against further currency weakness, hedging currency into euros could be a strategy to consider.

While there are at least three ETFs in the US that specifically track UK equities but hedge out the currency risk to US dollars, there are surprisingly few options available for European-based investors. Providers may have got to grips with currency-hedged Japanese equities, European and even specifically German equities, but currency-hedged UK equities are sorely lacking competition.

UBS is the only provider to offer an ETF on UK equities hedged into euros (UBS ETF MSCI UK hedged EUR UCITS ETF) and it costs just 0.30%. Performance wise, it is up 1.6% year to date.

But when it comes to other providers, the best bet is to buy into a broad European equity index and hedge into US dollars.

iShares offers two funds that track European equities, hedged into Swiss Francs or US dollars for 0.38%.

db X-trackers also has the MSCI Europe Index UCITS ETF, hedged into US dollars, for 0.35%. WisdomTree Europe’s competing offer (HEDJ) costs 0.58%.

With the history of fluctuating Sterling around the Scottish referendum to leave the UK in 2014 and now further uncertainty over the next 10 weeks, investors could make a safer bet on ETF providers bringing out more currency-hedged UK equity ETFs than guessing which way voters will turn on 23 June.

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