As the United Kingdom starts poring through votes deciding whether the nation should stick with the European Union or head for the hills in a so-called “Brexit,” there are three British ETFs that deserve a close eye: The iShares MSCI United Kingdom ETF (NYSEARCA:EWU), the iShares MSCI United Kingdom Small-Cap ETF (BATS:EWUS) and the First Trust United Kingdom AlphaDEX Fund (NASDAQ:FKU).
These are part of a handful of British ETFs that cover the nation’s stocks, and as such, they’ve been volatile as all get-out, moving on every poll or change of betting odds surrounding the referendum on EU membership.
Many believe that a Brexit would lead to hundreds of thousands of job losses, a massive dip in gross domestic product and major issues with creating new trade agreements that are anywhere near as favorable as what they have on the merit of being an EU member.
And thus, the more it looks like the U.K. will stay put, the better British stocks have been (generally speaking).
Here’s a quick look at EWU, EWUS and FKU — a trio of British ETFs that are among the best ways to play the nation, whether you want to go long for a spike, or try short plays if a Brexit really does come to pass:
British ETFs: iShares MSCI United Kingdom ETF (EWU)
Expenses: 0.48%, or $48 annually for every $10,000 invested
The iShares MSCI United Kingdom ETF (NYSEARCA:EWU) is the largest of the Britain-focused exchange-traded funds by a mile, with more than $2 billion in assets in this index fund versus a paltry $160 million or so for the next-closest competitor.
The EWU is a fairly diversified fund that offers double-digit weightings in five different sectors, though financials (21%) and consumer staples (19%) make up the lion’s share of the fund. Still, there’s a great deal of variety in its top 10 holdings, with HSBC Holdings plc (ADR) (NYSE:HSBC), British American Tobacco PLC (ADR) (NYSEMKT:BTI) … and, oddly, Royal Dutch Shell plc (ADR) (NYSE:RDS.A, NYSE:RDS.B). (While the company is headquartered in the Netherlands, it stems from U.K. ancestry via the “Shell” Transport and Trading Company Ltd.)
These three companies are weighted between 5.3% and 4.6%, which for a 114-holding ETF is a little on the heavy side, but they’re not such an outsize part of the fund that it’s worth worrying about.
In addition to being a very direct play on any Brexit outcome — the stock has popped about 8% earlier this week as a Brexit looked less likely — it’s also a very high-yielding fund that doles out a roughly 4% yield based on current prices.
British ETFs: First Trust United Kingdom AlphaDEX Fund (FKU)
Expense Ratio: 0.8%
The First Trust United Kingdom AlphaDEX Fund (NASDAQ:FKU) is another index fund tackling British stocks, though it tracks an “enhanced” index that ranks stocks and creates a 75-stock portfolio based on metrics such as sales-to-price ratio, price appreciation across several time lines and book-value-to-price.
The goal is to get a better set of holdings than by simply holding and ranking stocks based on market cap.
The result is a fund that’s slightly less balanced on a sector basis than EKU, with financials representing 31% of the fund, and consumer discretionary at 26% of the fund (staples makes up less than 4% of this fund — a great divergence from EWU). Only two other sectors — industrials (15%) and information technology (11%) — are represented in double-digit weights.
That said, FKU is an equally weighted fund, so on a holding-by-holding basis, overweight is far less of a problem than in iShares’ fund. None of this British ETF’s holdings make up more than 3% of the fund currently. At the moment, JD Sports Fashion, 3i Group and Shaftesbury are top dogs on the holding list.
A noticeable downside to First Trust’s offering? It’s significantly more expensive than its iShares counterpart.
British ETFs: iShares MSCI United Kingdom Small-Cap ETF (EWUS)
Expense Ratio: 0.59%
As the name would imply, the iShares MSCI United Kingdom Small-Cap ETF (BATS:EWUS) is a British ETF that focuses on smaller companies within the island nation.
Why small caps?
Well, one reason you’d gun after British small-cap stocks is the same reason you’d target American small caps, or smaller companies from anywhere else in the world — growth potential. The old adage goes that it’s easier to double revenues from $1 million than it is to double them from $1 billion, and thus there’s a lot more room for shares to grow, too.
It’s interesting, though: Despite the focus on much smaller stocks, the top sector weight is the same as EWU and FKU, with financials making up a quarter of the fund. However, consumer discretionary and industrial stocks, each make up more than 20% of EWUS’ weight. Information technology is the only other double-digit sector holding at 11%.
Top holdings are a who’s who of “who’s that?” companies for Americans, including business intelligence and academic publishing firm Informa and online real estate portal operator Rightmove.