In light of a potential headache from a protracted Brexit negotiation, exchange traded fund investors seeking Europe exposure have turned to options that specifically exclude United Kingdom exposure.
The “Europe ex-UK” investment class is quickly gaining steam as offshore investors actively avoid lumping British exposure into any Europe-region investment, with Brexit and London’s role as the regional financial hub in question, Reuters reports.
According to Lipper year-to-date flows data, ETFs that track European stocks excluding the U.K. are the ones attracting the greatest inflows. For instance, among the most popular picks, the the iShares MSCI EMU ETF (NYSEArca: EZU), an ETF that tracks countries in the European Monetary Union or Eurozone, which excludes United Kingdom and Switzerland country exposure, has seen $3.9 billion in net inflows so far this year.
On the other hand, regional ETFs that include U.K. exposure have experienced outflows, indicating investors are only looking for Eurozone exposure and avoiding British stocks.
“The two regions have been separate but that has been accentuated by Brexit,” Stephen Mitchell, a portfolio manager who runs a global equities fund at Jupiter Asset Management, told Reuters. “American investors left the UK in the two weeks after Brexit – by July 2016 they were gone. The uncertainty of Brexit has kept them out. That’s probably going to continue to be the case for the time being.”
Political risks across the North Sea are also diverging as Eurozone political risks have eased following the French election, whereas the U.K. election that was previously considered a forgone conclusion until last week now looks less certain.
Furthermore, the economic outlook in the U.K. is being weighed by concerns over the sustainability of consumer spending while the outlook in the E.U. is more upbeat.
“This is one area where the contrast with continental Europe is very strong,” Isabelle Mateos y Lago, Chief Market Strategist at the world’s largest asset manager BlackRock, told Reuters. “It’s hard to quantify how serious, but we’ve already seen that since the Brexit referendum, UK consumers have been drawing down their savings to an all-time low savings rate.”
Investors interested in Eurozone exposure sans British stocks can also consider the SPDR EURO STOXX 50 (NYSEArca: FEZ), which also focuses on Eurozone members.
Alternatively, investors who believe the euro currency will continue to weaken and are bullish on the Eurozone’s outlook can turn to currency-hedged ETF options, such as the the Deutsche X-trackers MSCI EMU Hedged Equity ETF (NYSEArca: DBEZ), iShares Currency Hedged MSCI EMU ETF (NYSEArca: HEZU) and WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ). These currency-hedged Europe ETFs may outperform non-hedged Europe funds if the euro continues to depreciate against the U.S. dollar.
For more information on European markets, visit our Europe category.