Large-cap U.K. stocks have good exposure to faster-growing emerging markets, have a defensive tilt, and are trading at attractive valuations.
While we usually recommend using single-country funds as
satellite holdings given their niche exposure, we think
First of all, this fund is dominated by high-quality
global firms such as
Before adding this fund, we suggest investors check their existing exposure to U.K. equities. On average, U.K. equities account for about 20% of a broad foreign-developed fund and about one third of a Europe fund.
As of the end of April 2012, this exchange-traded fund was trading at a relatively low trailing 12-month P/E of 10 times (10 years ago, this ratio was 24 times), which reflects pessimism regarding a weak U.K. economy, slowing global growth, uncertainty regarding the eurozone, and the long-term effects of deleveraging across the developed world. While these macroeconomic issues may continue to weigh on U.K. equities in the near and medium term, we think U.K. equities may be one of the "least bad" options within the international developed equities space, as Europe grapples with its sovereign debt crisis and as Japanese exporters continue to struggle against a strong yen. And fundamentally, corporate United Kingdom is in good shape, with healthy balance sheets, solid margins, and rising dividends. At this time, this fund's dividend yield is over 3%. While we think this ETF looks attractive for investors with a long term horizon, we do expect this fund to see some volatility in the near term given the ongoing euro debt crisis.
Like most international-equity ETFs, EWU does not hedge its foreign-currency exposure. As such, its returns reflect both asset price changes and changes in the U.S. dollar and pound sterling exchange rates. Some investors seek non-U.S.-denominated assets as a hedge against a potentially weakening U.S. dollar. At this time, the pound sterling is trading about 20% below its historical average against the euro and is trading slightly below average against the U.S. dollar, which reflects expectations that the Bank of England will maintain record-low rates in 2012 and may extend its bond purchase program. We don't expect to see any strong downward movements in the pound sterling versus the U.S. dollar in the near term.
This fund is diversified and holds many firms that boast solid
competitive advantages or economic moats. In addition, many large-cap U.K.
firms, such as HSBC and Vodafone, have strong and well-established operations in
the faster-growing emerging markets.
This fund tracks the MSCI United Kingdom Index, which is a capitalization-weighted index that aims to capture 85% of the total U.K. equity market. EWU holds about 105 stocks that trade on the London Stock Exchange. The fund is top-heavy, with the top 10 stocks comprising 46% of the portfolio. Many of this fund's top holdings are also listed in New York and are covered by Morningstar equity analysts.
The U.K. market is very liquid, so we think EWU's expense ratio of 0.53% is a bit on the high side. However, there are currently no other options for broad exposure to U.K. equities. This ETF has done a good job tracking its index.
For somewhat similar exposure, investors can consider European ETFs. We suggest