Etfs To Buy Amid Brexit: A Guide

The UK's departure from the EU has had a significant impact on the global economy, and investors are now considering how to navigate the post-Brexit landscape. With ongoing uncertainty around trade deals and the future relationship between the UK and the EU, investors are exploring various options to protect their portfolios and capitalise on new opportunities. Exchange-traded funds (ETFs) offer a way to gain exposure to specific markets, sectors, and asset classes, and several ETFs have been highlighted as potentially beneficial in a post-Brexit environment.

Some experts suggest that a no-deal Brexit could lead to a fall in the value of sterling, increased costs of imports, and higher interest rates. In this scenario, ETFs that benefit from rising inflation, such as the iShares GBP Index-Linked Gilts Ucits ETF, could be advantageous. Moving assets out of the UK or Europe and into other currencies, such as the US dollar, is another strategy proposed by experts. The JPMorgan USD Ultra-Short Income ETF is recommended in this case, as it has a portfolio duration of less than a year, reducing sensitivity to rising interest rates.

On the other hand, if a trade deal is reached between the UK and the EU, ETFs that provide exposure to UK and European equities could be attractive. The Vanguard FTSE 250 Ucits ETF, for example, could benefit from renewed confidence in UK assets. The iShares STOXX Europe 600 Industrial Goods & Services Ucits ETF is also suggested as a way to gain exposure to European manufacturers, who may benefit from a comprehensive trade deal.

Overall, while the impact of Brexit on the global economy is complex and uncertain, investors can consider a range of ETF options to either mitigate risks or take advantage of new opportunities that may arise.

ETFs to invest in if there is a trade deal

If a trade deal is reached, investor confidence in the UK market is likely to be boosted, with smaller companies dependent on EU trade expected to see the greatest uplift.

Sam Dickens, portfolio manager at IG, suggests that the Vanguard FTSE 250 Ucits ETF could be a good investment in the event of a trade deal. This fund has a low annual fee of 0.10% and a low tracking difference of -0.12%.

Peter Sleep, senior portfolio manager at Seven Investment Management, believes that a comprehensive trade deal would also probably boost European manufacturers. He recommends the iShares STOXX Europe 600 Industrial Goods & Services Ucits ETF, listed in Germany, which has an annual charge of 0.46%.

If you are a UK investor with significant exposure to US equities, you could consider reducing your dollar exposure with a currency-hedged ETF such as the iShares Core S&P 500 ETF GBP. However, this comes with higher costs than the unhedged version, with an expense ratio of 0.1% compared to 0.07%.

Other ETFs to consider in the event of a trade deal include the iShares MSCI United Kingdom ETF (EWU), which has a competitive management fee of 0.47%, and the Invesco CurrencyShares British Pound Sterling Trust (FXB), which provides exposure to fluctuations in the value of the British pound relative to the US dollar.

ETFs to invest in if there is no trade deal

If there is no trade deal between the UK and the EU, investors will be faced with a great deal of uncertainty. In the event of a "no-deal" Brexit, the UK and EU would default to World Trade Organization rules, introducing a host of tariffs and stricter regulatory barriers. This would be particularly disruptive to sectors vulnerable to high tariffs and border queues, such as the food and automotive industries. In this scenario, investors may want to consider the following ETFs:

IShares GBP Index-Linked Gilts Ucits ETF

This ETF could be boosted by fresh bidding for inflation-protected government bonds. It has a low annual charge of 0.1%, but a long duration, so there is a risk that the price could fall significantly if interest rates were to rise. However, central banks have indicated that monetary policy will remain supportive for the time being, making inflation-protected bond funds an attractive option.

JPMorgan USD Ultra-Short Income ETF

This ETF is recommended as a near-cash product with a portfolio duration of less than a year, reducing sensitivity to rising interest rates. It has an annual fee of 0.18%.

IShares $ High Yield ETF

The US government has been buying this ETF as part of its quantitative easing to support the economy, which should help maintain prices. It offers a distribution yield of about 5.3% and the chance of capital gain, especially if economic activity in the US picks up.

Xtrackers FTSE All-World ex-UK ETF

This ETF tracks an index with over 3,800 companies from 55 countries and has an annual yield of 2.24%, which is automatically reinvested. It performed strongly in 2016 due to the falling pound, with the added bonus of having no UK exposure.

Invesco CurrencyShares British Pound Sterling Trust (FXB)

This ETF provides exposure to changes in the value of the British pound relative to the US dollar. It has a tight spread of 0.02% and $13 million in average daily dollar volume, making it suitable for traders who want a cost-effective way to trade the pound.

ETFs to invest in if there is a stalemate breakthrough

If there is a stalemate breakthrough, investors who want to position themselves for the outcome should consider the following Brexit-sensitive exchange-traded products (ETPs):

IShares MSCI United Kingdom ETF (EWU)

EWU was launched in 1996 and aims to track the performance of the MSCI United Kingdom Index. The fund's portfolio of roughly 100 stocks includes HSBC Holdings, Royal Dutch Shell, and BP. The fund has a competitive 0.47% management fee and has assets under management (AUM) of $2.13 billion. It issues an attractive 4.56% dividend yield, but has underperformed the S&P 500 Index by 12.43% over the same period as of August 23, 2019. EWU shares have oscillated within an orderly descending channel since setting a 2019 high in April. However, the fund has recently found support near the pattern's lower trendline, which may lead to further short-term upside. The moving average convergence divergence (MACD) indicator has also crossed above its signal line, generating a buy signal. Those who take a long position should look for the price to test the channel's upper trendline and set a stop-loss order underneath the August low.

Invesco CurrencyShares British Pound Sterling Trust (FXB)

FXB provides exposure to fluctuations in the value of the British pound relative to the US dollar. The fund takes a simple approach by holding British pounds in a deposit account. FXB leads the space in terms of size and liquidity, with net assets of $136.55 million and nearly 40,000 shares changing hands per day. The fund has a razor-thin 0.02% spread, ensuring that slippage does not eat into bottom-line costs. As of August 23, 2019, the fund has slipped 4.87% for the year, a substantial decline for a Group of 10 (G10) currency. The FXB share price has traded within a steep descending channel since early April but has recently moved toward the top of the channel, breaking out above an inverse head and shoulders (H&S) pattern. The relative strength index (RSI) gives a reading just above 50, allowing ample room for the price to move higher before consolidating. Those who take a trade should anticipate a move to $122, where the fund may encounter overhead resistance. Protect the downside by placing a stop slightly below the inverse H&S pattern's neckline.

VelocityShares Daily 4x Long GBP vs. USD ETN (UGBP)

UGBP seeks to replicate the performance of the VelocityShares Daily 4X Long GBP vs. USD Index, providing a cost-effective instrument for traders to gain leveraged exposure to changes in the spot exchange rate between the British pound and the US dollar, as well as overnight interest rate differentials. Traders should be aware that returns for holding periods greater than one day may deviate from the fund's advertised four times leverage due to the effect of compounding. UGBP has a slightly wider 0.13% average spread and thinner daily trading volumes of about 3,000 shares. The fund has slumped 22.04% YTD, falling almost 11% in the last month alone as of August 23, 2019. The UGBP chart closely mirrors that of FXB, and bearish sentiment has gained momentum since mid-May. However, the price has recently staged an uprising, threatening to break above a descending channel's top trendline and trigger a short squeeze. Traders could exit at either $17.50 or $19 – both key resistance levels, while limiting risk with a stop situated under yesterday's low.

Other Considerations

In the event of a stalemate breakthrough, it is expected that the value of sterling will rise, which may affect international investments. For UK investors, a stronger pound will result in lower returns on foreign currency conversion. To reduce dollar exposure, investors can consider a currency-hedged ETF such as the iShares Core S&P 500 ETF GBP. However, investors should be aware that the hedged share class comes with much higher costs.

Additionally, investors may want to consider ETFs that track indices on small and mid-cap companies, such as the FTSE 250 index, or alternative indices such as the FTSE RAFI UK 100 index, which selects and weights index constituents using fundamental factors like dividends, cash flows, sales, and book value.

Finally, it is important to keep in mind that the outcome of Brexit negotiations is just one factor influencing the markets. Other events, such as the COVID-19 pandemic, can have a more significant impact on companies' fortunes. Investors should carefully consider their risk tolerance and investment goals before making any investment decisions.

ETFs to avoid if there is a no-deal Brexit

A no-deal Brexit could see the UK economy contract by about 8% over 12 months, unemployment rise to 7.5%, house prices fall by 30% and the British pound drop below parity against the US dollar. In this scenario, ETFs to avoid include those that are heavily exposed to the UK and the British pound. Here are some examples:

IShares United Kingdom ETF (EWU)

The iShares MSCI United Kingdom ETF (EWU) is heavily exposed to the UK market, tracking the performance of the MSCI United Kingdom Index. It holds large- and mid-cap British companies that trade on the London Stock Exchange (LSE). As a result of the high exposure to the UK, the fund may underperform in the event of a no-deal Brexit.

Invesco CurrencyShares British Pound Sterling Trust ETF (FXB)

The Invesco CurrencyShares British Pound Sterling Trust ETF (FXB) provides investors with exposure to the British pound versus the US dollar. In the case of a no-deal Brexit, the British pound is expected to weaken, which would negatively impact the performance of this ETF.

Vanguard FTSE 250 UCITS ETF

The Vanguard FTSE 250 UCITS ETF provides exposure to small and mid-cap UK companies. In the event of a no-deal Brexit, smaller companies are likely to be more negatively impacted due to their dependence on EU trade. Therefore, this ETF could underperform.

IShares STOXX Europe 600 Industrial Goods & Services UCITS ETF

While this ETF is not directly linked to the UK, it holds a significant number of European manufacturers that could be impacted by a no-deal Brexit. A disruption to trade between the UK and the EU would likely hurt European manufacturers, causing this ETF to underperform.

IShares MSCI United Kingdom Small-Cap ETF (EWUS)

The iShares MSCI United Kingdom Small-Cap ETF (EWUS) provides exposure to small-cap companies in the United Kingdom. Small-cap companies are generally more vulnerable to economic shocks, and a no-deal Brexit could significantly impact their performance. Therefore, this ETF may be one to avoid.

In summary, when considering ETFs to avoid in the event of a no-deal Brexit, look for those with high exposure to the UK market, the British pound, and small-cap companies. These are likely to be the most vulnerable to the potential negative economic impact of the UK leaving the EU without a deal.

ETFs to invest in if there is a recession

While the UK's departure from the EU has created uncertainty in the markets, there are several ETFs that can be considered recession-proof. Here are some options to invest in if there is a recession:

Consumer Staples ETFs:

• Consumer Staples Select Sector SPDR ETF (XLP): Tracks the performance of the Consumer Staples Select Sector Index, with holdings in companies like Procter & Gamble Co., Coca-Cola Co., and Walmart Inc.
• Invesco Food & Beverage ETF (PBJ): Tracks the performance of the Dynamic Food & Beverage Intellidex Index, with holdings in companies like Kroger Comp., Kraft Heinz Co., and Constellation Brands Inc.
• Vanguard Consumer Staples ETF (VDC): Tracks the performance of the MSCI US Investable Market Index/Consumer Staples 25/50, with holdings in companies like Procter & Gamble Co., Costco Wholesale Corp., and Walmart Inc.

Healthcare ETFs:

• IShares US Healthcare Providers (IHF): Tracks the performance of the Dow Jones U.S. Select Health Care Providers Index, with holdings in companies like UnitedHealth Group, Elevance Health Inc., and Cigna Corp.
• IShares Global Healthcare ETF (IXJ): Holds U.S. healthcare giants like Eli Lilly & Co., Johnson & Johnson, and UnitedHealth Group Inc., as well as European companies like Novo Nordisk and AstraZeneca PLC.

Utilities ETFs:

• Utilities Select Sector SPDR ETF (XLU): Tracks the performance of the Utilities Select Sector Index, with holdings in utility companies like NextEra Energy, Southern Company, and Duke Energy Corp.
• IShares Global Utilities ETF (JXI): Tracks the S&P Global 1200 Utilities (Sector) Capped Index, diversifying beyond the U.S. to hold utilities from developed markets.

Other Options:

• Vanguard Dividend Appreciation ETF (VIG): Includes U.S. firms that have consistently increased dividend payments over the past decade, such as Microsoft Corp., Apple Inc., and Broadcom Inc.
• Vanguard S&P 500 ETF (VOO) or SPDR S&P 500 ETF Trust (SPY): Tracks the S&P 500 index, providing instant diversification across 500 of the largest and strongest U.S. companies.
• IShares 20 Year Treasury Bond ETF (TLT): U.S. Treasury Bonds are seen as a safe haven during times of elevated geopolitical risk and typically rally when global interest rates drop.
• IShares GBP Index-Linked Gilts Ucits ETF: This ETF could benefit from fresh bidding for inflation-protected government bonds, but there is a risk of falling prices if interest rates rise.

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