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Bank of England Keeps Interest Rates Intact: ETFs in Focus

Zacks Equity Research
Mutual Fund Report for PGOFX

In a sudden turnaround, the Bank of England (BOE) has kept  interest rates unchanged despite previous speculation of a rise. The MPC (Monetary Policy Committee) has voted 7-2 for maintaining the rate at 0.5%. The move has surprised most market analysts. As a result, the pound fell to $1.35 on May 10.

Analysts on Tenterhooks

The chief market analyst of CNC Markets said, “So yet again we have to digest another change of tack from Bank of England policymakers.” He also said that this decision will complicate the credit situation in the country and make the markets unpredictable. In the next two years, consumer price inflation is expected to ease to 2.1%.

The British economy has only grown by 0.1% on a quarterly basis, which is much lesser than the predicted 0.4% and one of the main reasons for holding the rates constant. Victoria Clarke, an Investec economist observed that probably the Bank of England could be waiting til August to see if the second quarter data can show a strong comeback, paving the way for a round of rate increase in that time period (read: U.K. ETFs in the Spotlight as Inflation Ticks Down).

Impact on Markets

Analysts at AJ Bell, an investment firm, were of the opinion that the continuous flip-flop has impacted the pound heavily but can be a positive for the real estate and utility sectors. Historical data suggests that whenever BOE has kept the rates unchanged these sectors have performed well.

BOE governor Mark Carney clearly stated that as the Asian markets were a bit down and the stormy weather in Britain resulted in massive unemployment in the construction sector, decision-making slowed down. However, the governor expects this to improve in the next quarter.

The exit of UK from the European Union and a slowing European economy are some of the important factors for the slowdown of the economy. BOE has cut the GDP forecast from 1.8% to 1.4% and downgraded projections from 1.8% to 1.7% in 2019 and 2020.

In March, the manufacturing output dropped 0.1% for the second consecutive time after February, when it had dropped by 0.2%. Per the Office for National Statistics, the decline is a result of reduced electrical equipment and pharmaceutical production. The cold weather hampered the construction sector with a 2.3% fall in March.

Investing in UK ETFs

Amid this backdrop, let's look at the top performing funds for the past year:

First Trust United Kingdom AlphaDEX Fund (FKU)

The investment objective of the fund is to track the NASDAQ AlphaDEX United Kingdom Index. Expense ratio is 0.80% and it assets under management is worth $18.8 million. This fund has 74 holdings and a daily traded volume of 4700 shares. The ETF has returned 17.8% in the past one year. The fund has Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

iShares MSCI United Kingdom Small-Cap ETF (EWUS)

The fund tracks investment results of the MSCI United Kingdom Small Cap Index. Assets under management of the fund are $22.6 million and expense ratio is 0.59%. The fund holds 259 stocks with an average daily traded volume of 5800. This is the third-best performing ETF among the UK funds. EWUShas returned 17.2% in the past one year and carries a Zacks ETF Rank #3 with a Medium risk outlook (read: U.K. Consumer Confidence Steadies: ETFs in Focus).

iShares MSCI United Kingdom ETF (EWU)

This fund has an expense ratio of 0.47% and 103 holdings. It has assets under management of $2.03 billion. Financials (21.8%), Energy (16.86%) and Consumer Staples (15.97%) are the top three sectors controlling the stocks. Average daily volume of trade is 2.39 million. No stock controls more than 7.5% in this fund. It has given yearly returns of 11.38% and has a Zacks Rank #3 with Medium risk outlook.

SPDR MSCI United Kingdom StrategicFactors ETF (QGBR)

This ETF provides investment results, which correspond to the total return performance of the MSCI UK Factor Mix A-Series Capped Index. The expense ratio of this fund is 0.30%. It has assets of $21.74 million under its control. This fund has an average daily traded volume of 4400 and holds 102 stocks. It has Consumer Non-Cyclicals (19.9%) and Financials (19.07 %) as the largest sector holdings. It has given yearly returns of 11.05% and has a Zacks ETF Rank #3 with a High risk exposure (read: Why These UK ETFs & Stocks deserve to be in Your Portfolio).

Xtrackers MSCI United Kingdom Hedged Equity ETF (DBUK)

The fund seeks investment results that correspond generally to the performance, of the MSCI United Kingdom US Dollar Hedged Index. The fund has an expense ratio of 0.45%. The total number of holdings is 105 and assets under management are $2.2 million. Average daily volume of trade is 560. The three main sector holdings include Financials (21.50%), Energy (16.22) and Consumer Staples (15.9%). The yearly returns of the Zacks Rank #3 ETF is 8.75%.

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FT-UTD KINGDOM (FKU): ETF Research Reports
ISHARS-MS UK SC (EWUS): ETF Research Reports
DEUTS-XT MS UK (DBUK): ETF Research Reports
ISHARS-UTD KING (EWU): ETF Research Reports
SPDR-MSCI UKSF (QGBR): ETF Research Reports
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