A Spot Of Tea With U.K. ETFs

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 |  Includes: DXPS, EWU, FXA, FXB, FXE
by: Tom Lydon

The British pound could strengthen on an improving economy and the Bank of England's more tolerant stance for a stronger exchange rate, bolstering United Kingdom-related exchange traded funds.

Britain's economy expanded at its fastest clip in three years over the third quarter, Bloomberg reports. Meanwhile, traders are speculating that the BOE will raise benchmark rates sooner-than-expected, even at the risk of strengthening the currency further.

"As long as the economy continues improving, we're unlikely to get any moaning about the strength of the pound," Steve Barrow, the head of Group-of-10 research at Standard Bank Plc, said in the article. "When the economy was weak," policy makers "including ex-Governor King, seemed to implore the markets to weaken the pound."

Cable has appreciated 3.1% against nine developed market currencies over the past three months, the largest advance in the group. The CurrencyShares British Pound Sterling Trust (NYSEARCA:FXB), which tracks the performance of the pound sterling against the U.S. dollar, has gained 4.8% in the last three months.

In comparison, the CurrencyShares Euro Trust (NYSEARCA:FXE) rose 3.7% in the past three months while CurrencyShares Australian Dollar Trust (NYSEARCA:FXA) increased 3.6%.

The U.K. GDP expanded 0.8% in the third quarter, up from 0.7% in the second quarter and the most since 2010.

"With every release the U.K. credentials are reinforced, the economy is picking up, as seen in the GDP figures," Neil Mellor, a foreign-exchange strategist at Bank of New York Mellon in London, said in the article. "There's a probability that the BOE will have to rein in its forward guidance more quickly than many had expected. That would push sterling higher."

The iShares MSCI United Kingdom ETF (NYSEARCA:EWU) is up 3.9% over the past month, up 8.2% in the last three months and 15.9% higher year-to-date.

In comparison, the WisdomTree United Kingdom Hedged Equity Fund (NASDAQ:DXPS), which hedges against depreciating sterling but under-performs a non-currency-hedged ETF if the currency strengthens, has gained 2.3% in the last and rose 0.9% over the past three months.

iShares MSCI United Kingdom ETF

Click to enlarge

Max Chen contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates.