U.K. Market Opportunities: 3 Overlooked Funds With Big Potential
With one month left in the year, it’s time for investors to consider buying stocks from the United Kingdom (U.K.). Recently, Vanguard highlighted that it expects U.S. stocks to generate annualized returns of 5.2% over the next decade, 280 basis points less than non-U.S. developed markets. Small- and mid-cap stocks make up a major chunk of the publicly traded stocks in the U.K., and in mid-November, Bloomberg published a piece about how undervalued those U.K. stocks are.
“From 2020 to 2022, U.K. equities traded at a tiny premium to the Quest calculation of ‘fair value.’ They now trade at a 26% discount. Small and medium caps traded at a 19% premium to their fair value; now they trade at a 28% discount,” Bloomberg reported.
American investors ought to take off their home-country bias blinders in 2024 and look to the homeland of King Charles III for value opportunities they just won’t find here in the U.S. Here are three U.K. stocks to get investors in the game.
iShares MSCI United Kingdom ETF (EWU)
iShares MSCI United Kingdom ETF (NYSEARCA:EWU) tracks the performance of the MSCI United Kingdom Index, a collection of mid- and large-cap stocks in the U.K. It has a decent amount of net assets with $2.6 billion invested in 85 stocks.
Referencing the valuation issue mentioned in the introduction, the exchange-traded-fund’s (ETF) price-to-earnings (P/E) ratio and price-to-book (P/B) ratio are 11.6 and 1.6, respectively. That compares to 22.9 and 4.2 for iShares’ S&P 500 ETF. Most of that difference is likely due to the Magnificent Seven tech stocks in the S&P 500.
The average market capitalization of the 85 stocks is $52.5 billion, putting it well into large-cap territory. According to Morningstar.com, 83% of the net assets are in large-caps, with the remaining 17% in mid-cap stocks. Its top three sectors by weight are financials (18.28%), consumer staples (17.73%) and energy (13.86%). Technology accounts for just 1.08%.
Americans will be familiar with all of the names in the top 10 (50% of net assets). Charging 0.5%, EWU is an excellent way to bet on U.K. stocks.
Franklin FTSE United Kingdom ETF (FLGB)
The Franklin FTSE United Kingdom ETF (NYSEARCA:FLGB) tracks the performance of the FTSE UK RIC Capped Index, a collection of U.K. stocks ranging in size from a market cap of $2.26 billion to $224 billion. It has net assets of $605 million invested in 109 stocks.
The ETF’s P/E ratio and P/B ratio are 10.4 and 1.8, respectively. The weighted average market cap of the 109 stocks is $80.3 billion, even larger than EWU. However, mid caps account for 21%, 400 basis points more than EWU.
Its top three sectors by weight are financials (18.02%), consumer staples (16.94%) and industrials (13.16%). Technology accounts for just 1.06%. One of the only differences between FLGB and EWU is that industries are flipped with energy.
FLGB’s top 10 holdings account for 47% of its net assets. Many of the names in the top 10 are the same as EWU. One thing to keep in mind about this ETF is that the word “capped” in the index name means that a single holding can’t exceed a 25% weighting, and stocks exceeding a 5% weighting can’t add up to more than 50%.
The best part about FLGB is that it charges just 0.09%, one-fifth the management expense ratio for EWU.
iShares MSCI United Kingdom Small Cap ETF (EWUS)
The iShares MSCI United Kingdom Small Cap ETF (BATS:EWUS) is iShare’s ETF for smaller U.K. companies. It tracks the performance of the MSCI UK Small Cap Index, a collection of small-cap stocks that can be combined with EWU for greater U.K. exposure.
The ETF’s P/E ratio and P/B ratio are 12.7 and 1.4, respectively. The weighted average market cap of the 252 stocks is $2.8 billion, with mid caps accounting for 48%, small caps 44%, micro caps 3% and cash 5%. Its top three sectors by weight are industrials (21.62%), financials (17.16%) and consumer discretionary (16.98%). Technology accounts for just 1.06%.
Its top 10 holdings account for just 15% of its net assets, providing greater diversification among all of its stocks held. Unless someone has spent a lot of time in the U.K. or working with U.K. businesses, it’s unlikely they’ll recognize many of the names in the top 10, except for Marks & Spencer Group (OTCMKTS:MAKSY).
EWUS charges 0.59%, which is relatively reasonable for a small-cap ETF. On the downside, it has just $44.4 million in net assets. However, given iShares’ size, it can afford to keep EWUS alive to complement its larger stablemate.
On the date of publication, Will Ashworth did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
