Six ETFs to cushion against Brexit

by , 25th February 2018

If you’re worried that Brexit may damage your stock market portfolio, here are six ETFs you should consider investing in.

Before we go any further, the premise of this article is that Brexit will damage the UK economy in the short and long term. That’s clearly a controversial view which many will disagree with. But even if you’re convinced that Brexit will be a big success, you may still like the six ETFs we’re going to highlight.

Overseas

If you think the UK economy is set for years of slow growth to come – or at least slower growth than other major economies – it makes sense to invest in overseas markets. And that’s easy to do with ETFs.

The absolute easiest way is to go for a global equities ETF. So here’s the first of our six post-Brexit suggestions:

  1. Vanguard FTSE All-World UCITS ETF (VWRL)

This ETF tracks the FTSE All-World index which means investors get exposure to 90-95% of the global stock market.

The ongoing charge is reasonable at 0.25% although there are cheaper global equities ETFs available. However, those cheaper funds track the narrower MSCI World index which doesn’t include many emerging market stocks. Given that emerging market economies are likely to deliver the fastest economic growth over the next decade, it seems silly not to get some exposure to emerging market shares.

Granted, you can also get exposure to emerging market economies via multi-nationals like Unilever but given the growth in emerging economies such as India and Indonesia, it surely makes sense to get some direct exposure via these countries’ domestic stock markets.

Even with the emerging market stocks in the index, around 50% of the ETF’s value is in US-listed stocks while around 8% is in Japanese stocks. UK-listed stocks make up another 8% or so of the fund.

There are around 3100 stocks in the ETF and financial services is the largest sector, with an 18% to 20% weighting, followed by information technology with around 14%.

You might think it better to go for a global ETF that doesn’t include UK-listed stocks but there are only a couple of global ex-UK ETFs out there and their charges are higher. For example, the Xtrackers FTSE All-World ex UK ETF (XDEX) has an 0.4% ongoing charge.

The 50% exposure to the US market is arguably a downside for this Vanguard fund. After all, US stocks look expensive at the moment – they currently trade on a CAPE ratio of around 30 which is much higher than their historic average. On the other hand, the pound is looking relatively strong against the dollar. Sterling fell a long way straight after the referendum, but at around $1.40 it’s retraced most of that fall, so that makes US shares a bit cheaper for UK-based investors.

  1. iShares Edge MSCI World Size Factor UCITS ETF (IWSZ)

If you want to diversify away from the Vanguard ETF, a factor-based approach is one way to do that. This ETF focuses on mid-cap and smaller stocks across 23 countries. 36% of the fund is invested in the US, with 20% in Japan. There are approximately 900 stocks in the ETF and when the fund is rebalanced every six months, every stock is given the same weighting. This means that the ETF effectively sells down the shares that are rising in price whilst buying the ones that are getting cheaper.

  1. iShares Core MSCI Japan IMI UCITS ETF (SJPA) 

Geographical diversification is also a good idea and Japan is a great place to start. The country’s  shares have had a good run in the last couple of years- the Nikkei 225 is up almost 40% over that time – but there’s room for more growth to come. Prime Minister Shinzo Abe has pushed through some much-needed economic reforms not the least of which has been a change in corporate culture. Company boards are now more responsive to the needs of shareholders and are willing to pay bigger dividends as well as carry out share buybacks.

The iShares Core MSCI Japan IMI UCITS ETF (SJPA) gives you good broad exposure to the Japanese market. The MSCI Japan IMI index covers around 1200 Japanese companies and represents around 99% of the Japanese stock market. The ongoing charge is just 0.2% which means this is a cheap way to invest in Japanese stocks.

  1. iShares Core MSCI EM IMI UCITS ETF (EMIM)

This ETF tracks the MSCI Emerging Market IMI index which covers around 2700 companies in 24 emerging markets. However it is heavily weighted towards three Asian countries with 28% of the fund in Chinese stocks, 15% in South Korea and 13% in Taiwan. The ongoing charge is 0.25%.

Gold and commodities

  1. ETFS Physical Gold (PHGP)

If you’re gloomy about the wider outlook beyond the UK, you may want to put some money into Gold. In fact, even if you’re pretty upbeat about the global economy, there’s a good argument for investing some of your portfolio in gold as it often provides a good insurance policy against inflation or any market turbulence.

The PHAU product from ETF Securities is an exchange traded commodity (ETC) rather than an exchange traded fund, but without getting hung up on the technicalities, it’s a cheap and simple way to invest in gold. The ongoing charge is 0.39%.

  1. ETFS All Commodities ETC (AIGC)

A broader commodities fund is another way to diversify your portfolio and commodities often perform well in an environment where inflation is on the up. This ETC tracks the Bloomberg Commodities Index and has an 0.49% fee.

Currency hedging

You may have noticed that we haven’t highlighted any ETFs that hedge currency risks. That’s because you’d expect an unsuccessful Brexit to damage the pound so there seems little point in hedging against the risk of a rising pound.

And even if you’re optimistic about the impact of Brexit, there’s still a decent argument against currency hedging: the cost. Hedging always adds to the fees for a fund and anyway, if you’ve got a diversified global portfolio, you may well find that all the different currency movements pretty much cancel themselves out over the long-term.

ETF Issuers Featured in this Article