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xavierarnau
Overview
The iShares MSCI United Kingdom ETF (NYSEARCA:EWU) provides exposure to large and mid-cap companies listed on the UK stock market. As of 16th November, the fund was invested in 83 different holdings, which include popular names such as Shell (SHEL) and AstraZeneca (AZN).
The fund has an expense ratio of 0.50% per annum (3rd cheapest among similar ETFs). Franklin Templeton provides a similar exchange-traded fund (“ETF”) with a cheaper expense ratio of 0.09% per annum.
Fund Performance
The EWU fund has returned 4.04% per annum since its inception. The fund has been able to track its index relatively closely, however, it has not been able to outperform it.
The poor return can be partially explained by the fund’s low exposure to the fast-growing IT sector which has helped indexes like the S&P 500 (SP500) to outperform.
BlackRock
Portfolio
The fund is heavily weighted towards the Financials and Energy sectors, representing nearly 30% of the portfolio. On the other hand, it has very low exposure to Information Technology, with only 3 investments in the sector equaling 1.12% of the portfolio.
The fund’s top 10 holdings include the following:
BlackRock
The 2022 Autumn Statement published today comes at a difficult time for the UK economy. How does the Autumn statement affect the fund? We will take a look at this in the next section.
Impact of the Autumn Statement
The UK government has been struggling to balance the books due to high levels of spending, stemming from the financial aid provided during the COVID-19 pandemic and the current Energy Price Guarantee.
As the Bank of England increases interest rates to tame inflation, the UK government is no longer able to borrow money cheaply and debt interest spending has been reaching record levels this year. Together with a slowing economy, the UK government had the difficult task of filling a £55 billion fiscal hole.
The Autumn statement has helped to restore the government’s economic credibility following the Liz Truss debacle. However, one of the biggest losers of this Autumn statement has been energy companies.
The UK government has announced that it will be increasing the Energy Profits levy by 10 percentage points to 35% and extend the measure to March 2028. This will hit two of the fund’s top ten holdings – Shell and BP p.l.c. (BP). Combined, these two companies constitute nearly 15% of the portfolio.
The Autumn statement also introduces a 45% Electricity Generator Levy. The impact on the fund will be much smaller as the portfolio has only a 3% exposure to electricity generators.
Higher taxes
UK investors have also been on the losing end. The UK chancellor announced that the dividend allowance would be cut from £2,000 to £1,000 next year and then £500 from April 2024.
Additionally, the annual capital gains tax exemption will be reduced from £12,300 to £6,000 next year, and then £3,000 from April 2024.
The introduction of higher income taxes will also reduce people’s ability to save and invest.
Overall, these measures will discourage investment in the UK stock market which will have an indirect impact on the fund’s holding.
However, it is not all bad. The measures introduced today have put the UK government back on track to a path of sustainable public finances. This will help to bring stability and confidence to the UK economy.
The UK chancellor has also announced the final Solvency II reforms, which will help unlock an investment ‘big bang’ across a whole range of sectors.
The fund has approximately 4% exposure to insurance companies, which will be direct beneficiaries of the Solvency II reforms.
Conclusion
By taking difficult decisions on tax and spending, the Autumn statement helps to restore financial stability following the Liz Truss catastrophe.
However, the negatives of the Autumn statement outweigh the positives and is a net loss for the fund.
The UK has been suffering from Putin’s illegal war in Ukraine which has contributed to a surge in energy prices.
Combined with the aftermath of the COVID-19 pandemic and the loss of its biggest trading partner from Brexit, the UK has been a laggard among G7 countries.
I am not a big fan of the EWU fund and the UK stock market in the current environment. Until the inflation problem is sorted out, I would not advise investing in EWU.
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