As Scotland votes on its independence Thursday, the fate of the U.K. remains too close to call.
But ETF investors have been voting all month — with their money. Of the eight U.S.-listed ETFs specific to the U.K., three of the largest have seen large net cash outflow, while the remaining five have seen inflow match outflow.
IShares MSCI United Kingdom ETF (EWU) — the largest U.K.-related ETF, with a market cap of $4.13 billion — saw outflow of $40.5 million in August, says Morningstar. The fund tracks about 85% of the U.K. stock market. Its top three holdings are HSBC Holdings at 7.1% of assets, Royal Dutch Shell at 5.3% and BP at 4.9%.
The fund has tumbled 9% from its June high.
IShares MSCI United Kingdom Small-Cap ETF (EWUS) saw outflow of $10.2 million for the month ended Sept. 15, nearly a quarter of its total assets, according to research firm XTF. With its price declining 2% the past month, the fund has sunk 9% from its June high.
Even though investors have known about the vote all year, recent polls showing that the Scots favor leaving Great Britain have flamed uncertainty. And investors are famous for hating uncertainty.
“The vote is most important for the U.K., but Scottish independence would have broader significance as well, particularly for the rest of Europe,” wrote Russ Koesterich, global chief investment strategist for BlackRock’s iShares business, in a recent note. “At the very least, sterling and other U.K. assets would likely come under additional pressure. In addition, given that Scotland is typically more pro-European Union than the rest of the U.K., a departure could raise the odds of an eventual U.K. exit from the EU, which would only add to uncertainty in the region.”
Should the Scots vote “Yes,” the biggest losers will be the British pound sterling and Prime Minister David Cameron, who may be forced to call a new election.
CurrencyShares British Pound Sterling Trust (FXB), which tracks the performance of the pound against the dollar, saw the second most outflow over the past 30 days, $16.3 million, leaving it with $63.8 million in assets, according to XTF. FXB’s price fell 2% the past month and is down 5% from July, when the pound hit a multiyear high.
“If they vote ‘Yes,’ people might flee out of sterling because the government might be toppled,” said Axel Merk, president and chief investment officer of Merk Investments in Palo Alto, Calif. “But I’ve been buying sterling because I believe there will be a relief rally when the Scots say ‘No.'”
FXB has rallied 2% in the past seven sessions.
Scotland accounts for about 10% of Britain’s gross domestic product, but a “Yes” vote will create a lot of uncertainty over the North Sea oil assets, says Merk. People who don’t want uncertainty will take their capital from Edinburgh to London, he says.
Bucking the trend, Deutsche X-trackers MSCI United Kingdom Hedged Equity ETF (DBUK) is up 5% in the past month. It provides exposure to the U.K. stock market while using a hedging strategy to benefit from weakness in the pound.
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