The fallout from the United Kingdom deciding to leave the European Union is nowhere near over. In fact, it could be years before the uncertainty starts to clear. As an investor, however, you have to make a call at some point - do you want to invest in the UK or not? The answer can materially change things for your portfolio, particularly if you own exchange traded funds, or ETFs, and mutual funds.
What's it own?
When you buy a pooled investment product, you are inherently outsourcing the stock selection process. However, that increasingly means you are making asset allocation choices, leaving the individual stock selection to someone else (or something in the case of an index-based product). This isn't good or bad, but it does mean you should ensure that you understand what's going on at the pooled products you choose so you can make the best possible asset allocation decisions.
For example, iShares S&P Europe ETF (NYSEARCA:IEV) tracks the S&P Europe 350 Index. This index, "...measures the performance of the stocks of leading companies in the following countries: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom." That's the order in which the countries are listed in the prospectus, but the UK showing up last certainly helps prove a point. If you own IEV, you have exposure to the United Kingdom - and in a big way. As of June 24th, roughly 30% of the portfolio was devoted to the UK - the largest single country exposure at twice the allocation of the next largest country in the portfolio.
However, if you own iShares MSCI Eurozone ETF (BATS:EZU), your exposure to the UK is zero. This ETF tracks the MSCI EMU Index. This index, "...consists of stocks from the following 10 developed market countries: Austria, Belgium, Finland, France, Germany, Ireland, Italy, the Netherlands, Portugal and Spain." The subtle difference being that EZU is focused on countries that use the Euro, while IEV invests across all of Europe. Notice that EZU doesn't include Sweden or Switzerland, either.
The quick takeaway here is that if you want to get the UK out of your portfolio, then EZU is a good option. I'm not suggesting that's the right, or wrong, move, but EZU does offer a distinctly different way to invest in Europe.
There's more to think about here, though. These are both ETFs, what about actively managed funds? By their very nature it's going to be a little harder to figure your exposure to the UK with mutual funds, since managers can shift things around. But here's an interesting example to think about: BlackRock EuroFund (MUTF:MAEFX). This fund's objective is simply to invest in companies domiciled in Europe.
At the end of May, the UK made up 41% of the fund. That, for reference, was a 36% overweighting versus the fund's benchmark. It's easy to look back with the benefit of hindsight (that's 20/20) and say the managers made a mistake. But the truth is, you are basically paying active managers to make choices like this. If that's not what you want, you should probably just buy an index fund.
That said, if you own a fund and have concerns about the Brexit fiasco, you might want to take a moment to see what exposure you have to the situation. And keep an eye out for commentary about what any funds you own plan to do based on the changes to the EU and the market's gyrations.
Know what you own
But here's the thing, I chose these three funds on purpose because they are all sponsored by BlackRock (NYSE:BLK). Essentially, you need to worry about this issue, no matter what fund sponsor you are giving your money, because there are so many products and so many confusing names that you have to dig a little deeper to see what's going on.
While too many options can be bad on the one hand, it can also be good. For example, there's plenty of ways for you to adjust your portfolio according to your big-picture view. If you wanted, iShares MSCI United Kingdom ETF (NYSEARCA:EWU), another BlackRock fund, would let you make an exclusive bet on the UK. Options can be good, if you are willing to take the time to understand your choices.
Your big picture takeaway here, however, is that, in face of market upheaval, you need to make sure you really understand what you own. Looking back after the event isn't the best way to find out, but it's better to learn now than simply make changes without thinking.
Disclosure: I/we 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.