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How Brexit Will Impact The UK ETF's Big-Name Holdings

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How Brexit Will Impact The UK ETF's Big-Name Holdings

More than three years after being approved at the polls, Brexit remains a contentious issue in Great Britain with Prime Minister Boris Johnson continually pushing for new deadlines for the U.K.'s departure from the European Union.

An election is scheduled for Dec. 12, just weeks before the latest Brexit deadline of Jan. 31, 2020.

What Happened

Despite all the Brexit haranguing this year, the iShares MSCI United Kingdom ETF (NYSE: EWU), the largest U.K. ETF listed in the U.S., is higher by almost 13%. Not an awe-inspiring performance when considering the S&P 500 is up 23%, but decent all things considered.

In good news, the number of FTSE 100 companies mentioning Brexit on second-quarter earnings call was 27 during the June quarter, down from 48 in the same quarter three years earlier, according to FactSet research.

Why It's Important

EWU tracks the MSCI United Kingdom Index and holds 99 stocks, many of which are also FTSE 100 member firms.

“Companies in industries with high revenue exposure to Europe may be impacted by Brexit more than companies in industries with low revenue exposure to Europe,” FactSet said. “The revenue exposure of the FTSE 100 to Europe is about 40%, which is the highest revenue exposure in the index to any super-region. After Europe, the FTSE 100 has the highest revenue exposures to the Americas (31%) and Asia Pacific (24%) super-regions.”

Of course, there are sector and industry implications related to Brexit. U.K.-based telecom firms count on the EU for 78% of revenue, but that sector represents barely more than 5% of EWU's weight. FTSE 100 utilities names generate over two-thirds of their revenue within the EU, but that's one of EWU's smallest sector allocations at 3.31%.

What's Next

“At the industry level, the Telecommunications (-39%) and Utilities (-22%) industries are the only two industries that have reported price declines since the Brexit vote,” according to FactSet.

The consumer discretionary, consumer staples and financial services sectors have also lagged in Brexit's wake this year. Those groups combine for about 43% of EWU's weight.

Even with the consistent spate of Brexit controversy, investors have been adding to EWU this year as highlighted by 2019 inflows of almost $494 million.

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