Amid speculation the Bank of England will join the Reserve Bank of New Zealand in developed market central bank interest rate hike game, the CurrencyShares British Pound Sterling Trust (NYSEArca: FXB) has spent a significant portion of 2014 as one of the better-performing currency exchange traded funds.
That bullishness has ebbed dramatically as the pound is mired in a seven-week losing streak, its worst such skid since 2008. Since the start of July, FXB has tumbled 3.4% as currency traders’ enthusiasm for rate hike from BOE has waned.
“Sterling’s world-beating rally came to an end even as minutes of the BOE’s August meeting showed two policy makers voted for a rate increase this month. Forward contracts based on the sterling overnight interbank average, or Sonia, show investors have pushed back bets on a 25 basis-point increase in borrowing costs to May from as early as February last week,” reports Lucy Meakin for Bloomberg.
Sterling’s snapped rally has recently ignited shares of the WisdomTree United Kingdom Hedged Equity Fund (NasdaqGM: DXPS). An easy and accurate way of viewing DXPS is that is to the pound/dollar currency what the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) and the WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ) are to the dollar/yen and euro/dollar currency pairs. [Don’t Forget These Currency Hedged ETFs]
So as U.K. equities rallied along side the pound earlier this year DXPS and the rival Deutsche X-Trackers MSCI United Kingdom Hedged Equity ETF (NYSEArca: DBUK) lagged. With the pound ailing, that trend has reversed, sending DXPS higher by 3.5% over the past two weeks.
DXPS has its perks beyond the obvious of getting a lift from pound weakness. Those advantages include the ETF being reflective of the U.K.’s status as one of the top developed market dividend destinations outside of the U.S. The ETF’s almost 4.7% distribution yield speaks to that fact. [The Case for British Dividends]
Last year, British companies accounted for 11% of global dividends, a percentage bested only by the U.S.
Additionally, DXPS features an almost 17% allocation to the energy sector, an important trait on both the dividend and valuation front. On a book value basis, or a company’s value after stripping out its liabilities, the MSCI World Energy Index recently closed at a 15% discount to the MSCI World Index of developed markets. The gap compared with an average premium of 2.3 percent since 2000, reports David Wilson for Bloomberg.
Royal Dutch Shell (NYSE: RDS-A) and BP (NYSE: BP) combine for nearly 15% of DXPS’ weight. Those stocks trade at significant price-to-book discounts to Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX) while sporting sharply higher dividend yields. [Global Energy ETFs Remain Good Deals]
With some important U.K. data points due out this week, DXPS is worth keeping an eye on. Data will “show U.K. house-price growth stayed at slowest pace in 15 months in August and GfK NOP Ltd.’s sentiment index rose from the lowest level since April, according to the median estimates of economists,” the newswire reported.
WisdomTree United Kingdom Hedged Equity Fund