ETF Investors Seek Out Profits from Weak Sterling

Passive fund investors have been looking at ETFs which may benefit from a fall in the UK currency, according to the Morningstar most popular list in June

Karen Kwok 15 July, 2016 | 12:26AM
Facebook Twitter LinkedIn

Investors are looking to benefit from weak sterling post Brexit, data from Morningstar showed.

Sterling responded badly to the Brexit result on June 24, falling 10% overnight against the dollar. In the weeks following, the UK currency had fallen to levels not seen in 31 years, with a pound worth just $1.28.

Despite the UK currency spiking in value on Thursday as this week the Bank of England refrained from cutting interest rates to 0.25%, continuing Brexit-related uncertainty will put the currency under further pressure in the months ahead, said Anthony Doyle, investment director at M&G.

Hetal Mehta, senior European economist at LGIM agrees, saying that the UK currency could struggle to stabilise until there is more hard data on the impact of Brexit on the real economy, or more visibility on the new relationship between the UK and the EU.

Against that backdrop, it comes as no surprise exchange-traded fund investors have been looking at ETFs that track indices shorting the UK currency relative to the US dollar; ETFs Short GBP Long USD (SGB3) topped the most popular ETF chart among Morningstar.co.uk in June.

Spike in FTSE 100

A weak UK currency is beneficial to the FTSE 100, as most of the companies within the UK’s blue-chip index have international revenues.

“The likely prolonged weakness in sterling should mean that, for the first in almost a quarter of a century, the FTSE 100 should outperform the mid and small cap indices this year,” Chris Beauchamp, senior market analyst at IG Group, the London-based spread betting trading firm.

ETF investors have been looking to gain exposure to the UK’s 100 largest stocks as well, with Vanguard FTSE 100 ETF (VUKE) and iShares Core FTSE 100 ETF (ISF) coming second and fourth at the most popular ETF list among Morningstar.co.uk readers in June.

Both of these two funds provide exposure to large-cap segment of the UK market at competitive prices, said Morningstar analyst Hortense Bioy. iShares Core FTSE 100 ETF, the UK’s oldest and largest FTSE 100 ETF charges super low fees at 0.07%, while Vanguard FTSE 100 ETF charges at 0.09%, Bioy said.

However, Bioy warned investors that the attractiveness of these passive funds for long-term investors are limited due to their mega-cap focus and constrained nature.

“The FTSE 100 stands as a narrow investment proposition that doesn’t represent the opportunity set available to managers of active UK equity funds,” Bioy said. 

On the contrary, Vanguard FTSE All-World ETF (VWRL), which comes third on the most popular ETF list, provides exposure to a broader range of companies from 47 developed and emerging markets.

The Vanguard FTSE All-World ETF aims to replicate the FTSE All-World Index, which, with more than 3,000 constituents, covers 90%-95% of the global equity market capitalisation, Morningstar analyst Dimitar Boyadzhiev said.

The FTSE All-World allocates 7%-10% of its total value to emerging markets, making it a more comprehensive index than the popular MSCI World Index.

Boyadzhiev believes that this fund is well-representative of the opportunity set available to investors, having the potential to consistently outperform its category peers over the long term. It charges at 0.25%, the cheapest global equity ETF available, Boyadzhiev added.

Vanguard FTSE 250 ETF (VMID) also raised concerns among Morningstar.co.uk readers at a lower rank on the list.

Gold Rush to Safe Haven Asset

While investors are diversifying their risks amid uncertainty around future of the European Union and the UK, gold continues to become one of the safe haven investors seek as a store of value in times of severe economic dislocation.

Investors placed over $2.5 billion of exchange-traded product assets into gold exposures in the week following Brexit, according to data provided by BlackRock. 

Morningstar.co.uk readers that invest in ETFs also look to indirect investment in physical gold: ETFs Physical Gold (PHGP) came sixth at the most popular ETF list.

Relative to owning bullion or coins outright, gold ETFs offer the benefits of lower carrying costs, in most cases, and superior liquidity, said Morningstar analyst Ben Johnson.

Other popular ETFs on the most popular ‘hit’ list among Morningstar.co.uk readers are Vanguard S&P 500 ETF (VUSA), iShare UK Property (IUKP) and iShares UK Dividend ETF (IUKD).

ETFs are funds that trade like shares on the London Stock Exchange. They mimic stock market indices and are passively managed.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

Securities Mentioned in Article

About Author

Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk