Equity: U.K. - Total Market
The five ETFs offering exposure to the UK couldn't be more different. EWU offers a broad, plain-vanilla portfolio of over 100 large- and midcap UK stocks weighted by market cap. It is
“The three ETFs offering exposure to the UK couldnt be more different.” relatively concentrated in its top holdings, with large positions in mainstays like Royal Dutch Shell, HSBC and BP.
DXPS also includes the UK's biggest names but it reorders them based on dividend yield. Still, DXPS' big distinction is currency-hedging. The fund hedges against fluctuations in the pound sterling which gives investors exclusive access to equity returns. DXPS isn't the only currency-hedged game in town: DBUK also hedges pound sterling exposure. Unlike DXPS, DBUK sticks to a market cap-weighting scheme to provide plain vanilla exposure without the pound.
In contrast, FKU attempts to beat the market with its quant model. FKU holds the 75 stocks that it determines to have the best chance of outperforming, and weights them equally in tiers based on their attractiveness. FKU's portfolio doesn't look much like the broad UK equity market, but it does provide an alternative portfolio for investors intrigued by its AlphaDex model.
Lastly, QGBR sticks three separate strategies into a single fund. QGBR tracks a "quality mix" index that is one part U.K. securities with low valuations, one part U.K. securities that are relatively uncorrelated to each other, and one part U.K. securities with stable earnings and low leverage.
Strategy and exposure aside, cost is another disparity between the three funds. QGBR's quality mix portfolio is the cheapest of the bunch at 30 bps. The currency-hedged ETFs come next as DBUK's 45 bp fee slightly undercuts DXPS' 48 bp fee. A half-notch higher is EWU whose 51 bp fee is slightly higher than others in the group. Once spreads are factored into the equation EWU is the clear favorite as its tighter spreads more than make up for its slightly higher expense ratio. Meanwhile, FKU charges 80 bps for its quant-driven strategy and struggles with wide bid/ask spreads making it an all-around expensive fund to own and trade.
Given its superior liquidity and broad coverage, EWU is the Analyst Pick for the UK Total Market segment. (Insight updated 05/26/17)
All Funds (6)
EWU $2.71 B 2712030310 Most liquid, neutral choice
QGBR $13.32 M 13316250 High closure risk
DBUK $5.48 M 5479521.918 Doesn't trade
DXPS $18.49 M 18487125 Currency hedged, export focused
FKU $28.29 M 28290772.94186 Terrible tracking
HEWU $26.88 M 26884330 Ignore bad tracking
ETF.com Grade as 05/18/17
Equity: U.K. - Total Market
ETF.com Efficiency Insight
None of the Total Market UK funds is without its warts in Efficiency.
EWU, our Analyst Pick, charges 51 bps. That might have been a competitive expense ratio when the fund launched
“EWU is a very efficient fund” almost 20 years ago, but today it shares the space with several funds that charge lower fees despite following specialized strategies. Cost aside, EWU is a very efficient fund: It has never made a capital gains payout, meets all our transparency requirements, and has tracked its underlying index closely. It claims over 95% of the assets in the segment.
FKU is in trouble: In addition to charging the highest fee in the segment, its tracking results add further to costs. At one point in the past 2 years, it lagged its own index by more than 4%, a truly awful showing.
The other three funds in the segment all charge lower fees, but have struggled to attract assets. QGBR is the cheapest and most recent launch, but at this point it holds little more than its starting seed capital. All three funds face elevated closure risk. (Insight updated 05/26/17)
ETF.com Tradability Insight
EWU's excellent on-screen liquidity stands in stark contrast to the other funds in the segment. EWU trades over $30M worth of shares most days while most of the other funds barely
“EWUs excellent on-screen liquidity stands in stark contrast” trade at all. For example, most days go by without a single trade in DBUK or QGBR. Only FKU sees significant volume, and its quoted spreads have tended to be among the segments widest.
Investors looking to trade in bulk, however, have a variety of options as all of the funds charge reasonable creation fees and since they all hold large UK companies, underlying liquidity and market impact are not an issue. (Insight updated 05/26/17)
ETF.com Fit Insight
For five portfolios that try to capture the same market, they look radically different.
EWU takes the broad, plain vanilla passive investing approach. It holds the biggest stocks in the
“DXPS goes a step further to hedge against fluctuations in the pound sterling” UK and weights them by their market caps to capture the neutral UK equity market. In proportion to the UK equity market, EWU allocates heavily to energy and financials companies.
In contrast, FKU takes a semi-active approach. It holds 75 securities, chosen every six months based on perceived outperformance potential, and weights them equally within five tiers.
Meanwhile, DXPS and DBUK opt for the currency-hedged route. Aside from its currency-hedging DBUK sticks to a mostly plain-vanilla approach whereas DXPS selects and weights its portfolio by dividend yield.
EWU excludes small-caps so it tilts larger than both our benchmark and FKU, and has a large concentration of assets in its biggest names. FKU is at the opposite end of the size spectrum: It tilts smaller, since its weighting scheme reduces the influence of big companies like Royal Dutch Shell. It also currently excludes big names like HSBC and GlaxoSmithKline. DXPS caps its largest holdings which results in a slightly smaller profile as well.
The funds have different sector allocations as well. EWU and DBUK for the most part, mirror our segment benchmark with the heaviest allocations to financials, energy, and consumer non-cyclicals. In comparison, FKU makes major sector bets away from our benchmark. Currently it invests over 40% of its portfolio in financials, which make up less than 25% of EWU and DBUK. That said, FKU's tilts could change every six months, so long-term investors should buy the strategy rather than the current tilts. DXPS and QGBR are the only two funds to really curtail the dominance that financials have on the UK economy. DXPS redistributes the excess weight to dividend-heavy consumer non-cyclicals and basic materials companies, while QGBR focuses on industrials.
Overall, investors seeking exposure to the U.K. equity market should first decide if they want exposure to the pound sterling. If not, DXPS (dividend emphasis) and DBUK (vanilla) are the prime contenders. Investors seeking exposure to the pound sterling and the U.K. equity market must then decide if they want plain vanilla exposure or a fund that attempts to beat the market. For plain vanilla exposure, EWU is the right choice. Investors who, instead, want to take tilts away from the market might consider FKU or QGBR. (Insight updated 05/26/17)