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Brexit’s Impact on Europe ETFs

This article was originally published on ETFTrends.com.

The SPDR STOXX Europe 50 ETF (FEU) , an ETF offering a broad-based approach to European equities, is higher by more than 9% this year. That could potentially be a sign that some market participants are pricing an easing of Brexit-related tensions and volatility.

Europe has been among the least loved areas of the global markets. According to Bank of America Merrill Lynch, Europe equities experienced 25 straight weeks of fund outflows and was the only region recording meaningful outflows this year through the middle of the third quarter.

“Much of March will be dominated by Brexit headlines and nail-biting regarding potential 11 th hour deals,” said State Street in a note out Wednesday. “Rumors, fresh threats of UK leadership coups and more political grandstanding will likely move global markets throughout the month as the deadline approaches.”

Brexit implications are relevant to FEU because the ETF devotes 30.63% of its weight to U.K., by far the fund's largest geographic weight.

“Sadly, I’m afraid that whichever Brexit outcome we do get, it just won’t matter much either, especially to the UK,” said State Street. “It’s too late; the damage has already been done. UK citizens sealed their country’s fate the moment they voted to withdraw from the EU, irreparably harming both the UK and EU economies.”

Brexit: Boon Or Bane?

The U.K. is scheduled to leave the European Union on Mach 29, and some market observers fear that the country could exit the union without a deal on the terms of separation, which could cause disruptions in trade, travel and financial markets. Stocks and the currency would obviously suffer.

Related: ETF Investors Are Easing Back on Emerging Markets

Wary investors have been sidelining U.K. markets ahead of the uncertainty. According to fund tracker EPFR Global, investors have yanked money from U.K. equity funds for 10 consecutive months. Meanwhile, global fund managers ranked the U.K. as their least favorite region to invest in, according to Bank of America Merrill Lynch’s January survey.

“Although investors may find themselves tempted by compelling valuations, the promise of better times post Brexit and a weak currency to boost multinational earnings, investors should remain cautious on UK shares and Europe more broadly,” said State Street. “The self-inflicted harm of Brexit and broader structural challenges of the EU will likely take years to repair.”

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