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This Country ETF has Room to Rebound & Run!

In sticking with this week’s ETF/Smart-Beta theme, our members-only investment idea is a country-specific ETF. It’s one that’s been beat up politically and in the market, but remains stronger than many investors give it credit for. It’s a diversified, relatively low-cost, way to benefit from a rebound and continued long-term production and growth.

United Kingdom ETF (EWU) - Post Brexit

This week’s investment idea is the United Kingdom ETF (EWU). The UK stock market has declined moderately this year while other countries (e.g. the US) have posted gains.

Investor perception of the UK turned negative upon the unexpected Brexit result. Additionally, the currency has been weak. Not only do we believe the underperformance creates a contrarian investment opportunity, but we believe the weaker currency helps the UK with it exporting business.

Even though the UK is a net importer, exports are growing, and the weak pound makes UK exports more competitive in international markets.

Additionally, there are many UK companies in this ETF in particular that we believe present attractive investment opportunities. For example, the following table shows the ten largest holdings in the UK ETF.

For starters, the largest holding in the ETF (HSBC holdings) is a financial which we believe has continued upside as global financial markets continue to strengthen and normalize. Increasing interest rates will help.

Additionally, Energy companies comprise the next largest holdings. Energy has continued upside after being depressed from low oil prices (especially now that OPEC has agreed to reduce supply). Specifically, Royal Dutch Shell has more room to run, and BP remains in the doldrums providing plenty of room for a contrarian recovery.

Further, large drug makers like Glaxosmithkline and Astrazeneca remain very cheap relative to historical standards (here is our report on Astrazeneca from earlier this year).

Lastly, Consumer Staples make up a big portion of the index, and large holdings (BATS, Diageo, and Reckitt Benckiser) have all recently pulled back, making for a more attractive entry point.

Mexico ETF (EWW):

Not surprisingly, the Mexico ETF (EWW) has been a horrible performer since Donald Trump was elected (see earlier chart for performance). Trump's extremely tough talk on "building a wall" stoked fear with investors, and the post-election selloff has been dramatic.

However, we believe Trump was more talk than action with regard to Mexico and he is likely to soften his tone as he already has done with regards to other campaign topics (for example, he has eased up on calling for a special investigation of the Clinton Foundation). Trump's recent deal with Carrier to keep jobs in the US was small (only ~800 jobs), plus other organizations continue with plans to move some business to Mexico regardless of the election.

Russia ETF (RSX):

Worth mentioning, the Russia ETF (RSX) has performed very well following the election (see chart at the beginning of this report), however this is one we are avoiding. The narrative was of Trump's "bro-mance" with Putin, but in reality, the RSX post-election gains are more the result of rising oil prices than anything political. And realistically, it's likely the international community will continue to condemn and sanction Russia for it's aggressive geopolitical actions in the middle east and in the Ukraine.

Overall:

The UK ETF (EWU) offers diversification (it has over 100 holdings) and an attractive price (the expense ratio is relatively low at 0.48% annually), and a lot of contrarian upside. We don’t own this ETF in our Smart Beta ETF portfolio, but if you are a contrarian investor, this one is worth considering.

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