EWU: iShares MSCI United Kingdom ETF

EWU: iShares MSCI United Kingdom ETF

The iShares MSCI United Kingdom fund (NYSEARCA: EWU) is an exchange-traded fund, or ETF, that provides investors access to a select equities market by tracking the total performance return of the MSCI United Kingdom Index as its target benchmark. The MSCI United Kingdom Index is composed of 111 large- and mid-cap company stock holdings that together represent nearly 85% of the total free float-adjusted market capitalization of the United Kingdom. The Index utilizes the same standards and methodology of MSCI Global Investable Market Indexes which attempt to cover a wide range of regional, market capitalization, sector and style segments of the international equity markets. EWU follows the same standards as its benchmark index. As of August 2015, EWU has provided investors an annualized total return of 5.9% since the fund's inception in 1996.

How It Tracks It

EWU fund managers utilize a replication approach to effectively track the total performance return of the fund's benchmark index. Each equity position held within the ETF follows the same screening guidelines as the benchmark, and the majority of the fund's 111 holdings have the same weighting as the underlying index. Fund managers are required to invest a minimum of 90% of fund assets in securities or depository receipts of securities found within the benchmark, while the remaining 10% may be used for specific futures, swap and options contracts, or cash and cash equivalents at the fund manager's discretion. As of August 2015, performance of EWU lags the benchmark index by a 12-month median tracking difference of 0.49%, which is nearly equivalent to the ETF's gross expense ratio.

While EWU has a narrow focus in terms of geographic location and market capitalization, the fund diversifies investor assets over a broad range of business sectors. The heaviest sector weighting within the ETF is the financials sector with exposure of 23.27%. The consumers staples sector makes up 17.11% of fund assets, followed by the energy sector at 13.3%, the consumer discretionary sector at 10.57%, the health care sector at 9.65% and the industrials sector at 6.9%. In addition, EWU provides investors access to the materials, telecommunications, utilities and information technology sectors, each with less than a 6.5% exposure.

EWU's top holdings include HSBC Holdings PLC at 6.21%, Royal Dutch Shell PLC at 4.09%, BP PLC at 4.07%, British American Tobacco PLC at 4.03% and GlaxoSmithKline PLC at 4.02%.

Management

The iShares MSCI United Kingdom ETF is professionally managed by and made available to investors through the brand's parent company, BlackRock, Inc. As a leading provider of efficient, low-cost ETFs, iShares, with the support of BlackRock, manages more than $1 trillion investor assets and offers more than 700 ETFs that span domestic and international equities, bonds and money market investments. Within the iShares family of ETFs, EWU represents one of 38 single-country ETFs and one of three funds focused solely on the U.K.

Characteristics

EWU fund managers implement a passive management investment approach when allocating investor assets within the ETF. The purpose of passive management is to simply track the performance of an underlying index or benchmark, as opposed to outperform the overall market as is the case with actively managed investments. Because EWU is passively managed, the fund's gross expense ratio of 0.48% is considered low by industry standards. While EWU's expense ratio is slightly lower than the average expense ratio of 0.60% for all ETFs, it is higher than the category average expense ratio of 0.47%.

EWU is available for trading through the New York Stock Exchange Arca, the prominent exchange for all ETFs and other select exchange-listed securities. While the expense ratio for EWU represents a low cost of ownership for investors, trading fees, commissions and other transaction expenses may affect the total cost for buying and selling the fund. Each of these fees vary depending on the extent to which advisor or broker assistance is required and the trading platform used to execute a buy or sell order for the fund.

Suitability and Recommendations

Investment in EWU is appropriate for investors seeking exposure to large- and mid-cap companies operating within the U.K. Large market capitalization speaks to a company's long-standing reputation and ability to weather economic downturns better than smaller organizations. Additionally, the financial stability of large- and mid-cap companies often leads to steady dividend payouts over time, which can enhance the overall return within an investor's account. While growth is not typically the focus in large- or mid-cap international ETFs such as EWU, there is potential for an increase in stock price and company valuations over an extended period of time.

While EWU presents a unique opportunity to investors looking for specific exposure to the U.K. equity market, the fund carries with it some degree of risk. Large- and mid-cap companies located outside the domestic landscape face the risks inherent to international business operations, including political risk, natural disasters and currency risk. In addition to these threats to growth and stability of price, EWU's geographic focus is narrow, making it more susceptible to shifts in the equity markets of the U.K. when compared to a more diversified fund.

The risk metrics of beta and standard deviation clearly speak to the potential for volatility in performance of EWU and its underlying benchmark index. EWU has a five-year trailing beta of 0.96, meaning the fund it less likely to move in line with the domestic market. Additionally, EWU's five-year standard deviation is 15.54%, which points to the fund's overall volatility based on unpredictable returns spread over a large range. Due to these risk factors, EWU is best-suited for investors with a high tolerance for risk and a willingness to invest for a long-term.

How Financial Adviser Clients Could Use This ETF

A financial adviser can use EWU as a small holding within the international equity asset allocation subset of an otherwise diversified client account. Because EWU holds large- and mid-cap international stocks, financial adviser clients may utilize the ETF as a hedge against other international or domestic holdings not directly correlated with the market movement of the U.K. EWU also has the potential to pay steady dividends to investors, which can help pad investment returns over time. Due to the fund's risk profile and narrow focus, however, financial advisers should limit a client's exposure by refraining from using EWU as a single international holding. Instead, EWU should be positioned among other global equities and bonds, as well as a strategic mix of domestic equity and bond holdings.

Main Competitors and Alternatives

Regionally focused ETFs are common among large fund distributors, which creates competition for EWU. Alternatives to EWU include the First Trust United Kingdom AlphaDEX ETF, which tracks the performance of the Nasdaq AlphaDEX United Kingdom Index, and the SPDR MSCI United Kingdom Quality Mix ETF, which tracks the performance of the MSCI UK Quality Mix A-Series Index.

The First Trust United Kingdom AlphaDEX ETF includes 75 holdings and has an expense ratio of 0.8%, while the SPDR MSCI United Kingdom Quality Mix ETF includes 110 holdings and has an expense ratio of 0.3%.