United Kingdom ETFs: A Year After Brexit

After a little more than a year since the historic Brexit vote, United Kingdom exchange traded funds brushed off market concerns and enjoyed a strong year of growth.

The iShares MSCI United Kingdom ETF (NYSEArca:EWU), the largest U.K. ETF trading in the U.S., increased 15.3% and iShares MSCI United Kingdom Small-Cap ETF (NYSEArca:EWUS) gained 19.2% over the past year.

Moreover, since June 24, EWU attracted $364.9 million in net inflows, which suggested that investors did not take Brexit as a major impediment to the U.K.’s economy or market outlook.

Nevertheless, the recent U.K. election results have created more uncertainty over the path ahead for Brexit negotiations – while British citizens have made their stance clear with the Brexit vote, the government is still tasked with the onerous task of negotiating its eventual break from the European Union.

“The U.K. election resulted in a hung parliament, an outcome that creates uncertainty about the path ahead for Brexit negotiations. Although this is a mild short-term negative for U.K. domestic assets due to the uncertainty, we see a bigger risk of an economically disruptive ‘no deal’ Brexit – one that leaves the United Kingdom without existing trade or security agreements by the hard March 30, 2019 deadline,” BlackRock strategists said in a research note.

Many continue to believe that weakness in the British pound sterling may continue to have a lesser influence on U.K. large-cap companies, which have a greater international footprint, while weighing on U.K. small-caps, which may make up more business in domestic markets. Looking ahead, BlackRock anticipates the divergence to become more pronounced, with U.K. large-caps outperforming small-caps.