Reuters

(Reuters)

As Brexit Uncertainty Mounts, Watch These ETFs

By ETFs

Fueling market uncertainty, the United Kingdom will vote for the so-called Brexit referendum on whether or not it will remain in the European Union, potentially precipitating wide-reaching volatility on global markets and exchange traded funds.

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Debate on the Brexit vote has heated up as we draw closer to the June 23 referendum date. While many have warned of the negative effects of a Brexit vote going through, rising number of Euro-sceptics are turning out in Great Britain, with a number of polls showing counts that are too close to call or even in favor of a break from the European Union - London newspaper The Independent recently showed 55% believe Britain should leave the EU, compared to 45% in favor of staying.

The Brexit is widely seen as a negative market catalyst. For instance, in a note, Richard Turnill, BlackRock Global Chief Investment Strategist, argued that the vote would likely send shocks through global markets, pressuring riskier assets like stocks and corporate credit, in the ensuing risk-off environment as concerns over political instability.

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Specifically, Turnill warned that peripheral European assets and global financials and materials equity sectors would be especially exposed. On the other hand safe-haven investments would benefit.

Eurozone officials have also issued a warnings about the economic consequences of a Brexit. The immediate threat comes from a weaker British pound sterling and a hit to economic activity as an exit would remove the country's favorable trade agreements - the EU enjoys free trade between member states, which makes exporting cheaper and easier for British companies. According to a May Markit/CIPS PMI survey of companies, over one-third of companies reveal that the uncertainty over the Brexit vote has contributed to a detrimental effect on their businesses.

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Additionally, currency investors have been actively trading on sentiment ahead of the Brexit vote through the CurrencyShares British Pound Sterling Trust (NYSE:FXB). Retail investors are betting on a weaker pound by shorting the currency through FXB. The targeted currency ETF has been a popular play among retail investors who do not want to deal with the hassle of directly shorting currencies or using derivatives and leverage in complex foreign exchange trades. The pound sterling has weakened to $1.4265 from $1.4746 at the start of the year.

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A passing vote would weigh on broad Eurozone markets and related ETFs like the iShares MSCI EMU ETF (NYSE:EZU) and SPDR EURO STOXX 50 (NYSE:FEZ). Both EZU and FEZ cover Eurozone member states and exclude United Kingdom and Switzerland exposure. Year-to-date, EZU is flat while FEZ dipped 1.6%.

More aggressive currency traders can also target further weakness in the Eurozone through inverse ETF options if the vote passes. For instance, the ProShares Short Euro (NYSE:EUFX) is designed to provide 100% of the inverse, or opposite, return of the U.S. dollar price of the euro, on a daily basis and the ProShares UltraShort Euro (NYSE:EUO) provides 200% of the inverse return of the U.S. dollar price of the euro on a daily basis. The Market Vectors Double Short Euro ETN (NYSE:DRR) tracks the Double Short Euro Index, which also provides a -200% exposure to the euro.

U.K. markets are already feeling the pressure on the increased uncertainty. The iShares MSCI United Kingdom ETF’s (NYSE:EWU), the largest U.K. exchange traded fund listed in the U.S., is up 0.5% year-to-date. Although, the depressed pound sterling has helped currency-hedged options like the Deutsche X-Trackers MSCI United Kingdom Hedged Equity ETF (NYSE:DBUK) and the WisdomTree United Kingdom Hedged Equity Fund (NASDAQ:DXPS), which rose 1.5% and 4.5%, respectively, year-to-date. While a Brexit vote would drag on the markets, investors may find some solace knowing that a depreciating GBP could help the currency-hedged ETFs outperform non-hedged options.

Investors can also hedge against the growing uncertainty with safe-haven bets. For instance, gold and related SPDR Gold Shares (NYSE:GLD) have been a go-to hedge during uncertain times. Billionaire investor George Soros, known as "the man who broke the Bank of England" for his multi-billion bet against the sterling, is also reportedly betting big on bearish investments, including gold.

U.S. Treasuries may also enjoy greater interest as a safe-haven play away from European assets. ETF investors may look to options like the iShares 20+ Year Treasury Bond ETF (NYSE:TLT) for more long-duration exposure and iShares 7-10 Year Treasury Bond ETF (NYSE:IEF) for intermediate-term exposure. Furthermore, U.S. government bonds could see increased foreign demand as British investors may find U.S. assets, like Treasury bonds, a more attractive store of wealth since the GBP would likely depreciate against the U.S. dollar in the fallout.

This article was provided by our partners at etftrends.com.

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