Europe and UK-focused bank ETFs remain buoyant despite continued uncertainty regarding their operations after Brexit. Yet the count-down has begun with UK Prime Minister Theresa May officially signing Article 50, and signalling the UK’s intention to leave the European Union within two years.
Despite Brexit uncertainty, European bank ETFs continue to perform well with the Lyxor STOXX European 600 Banks UCITS ETF up 6.9% year-to-date in EUR terms.
Two days before May handed the Article 50 letter to European Council President Donald Tusk, the Bank of England asked banks in the UK to draw up plans for Brexit to reassure regulators that institutions were ready for “a range of possible outcomes”. The BoE said it would scrutinise the contingency plans closely.
The main risks for banks, it said, would be a rapid growth in UK consumer credit and rising debt levels in China.
Banks have already been pummelled with the news that the BoE will subject them to new, tougher tests regarding their financial resilience, as part of a report due to be published in November.
How banks plan to navigate Brexit – some are considering buying properties and moving staff overseas – cannot be overlooked. Financial services contributed £126.9 billion in gross value added to the UK economy in 2014, equivalent to 8% of total GVA, as well as accounting for more than 3% of jobs.
Financial services companies also make up the dominant sector of FTSE 100 ETFs – around 20.8% of the underlying index.
Goldman Sachs and HSBC have warned that some jobs will need to be relocated. At Citi, which employs 9,000 people in the UK, EMEA boss Jim Cowles told staff that they are preparing for a “hard Brexit” that could force job moves. A staff memo from JP Morgan executives, seen by Reuters, read: “We have spent the last several months reviewing the many variables in this process – client needs, employee considerations, regulatory requirements, operational risks, our inventory of licences, political issues in the region and dozens of other factors.”
Yet about two-thirds of major financial firms with UK operations are yet to make any public statement about their plans for Brexit, as reported by Reuters, which could bring surprises in the future.
Amid uncertainty, however, European bank-focused ETFs remain buoyant, whether or not they have direct UK exposure.
The largest bank-focused ETF listed in Europe is the €1.4bn iShares EURO STOXX Banks 30-15 UCITS ETF (Xetra: SX7EEX), the most expensive at 0.51% fees, which is up 8.8% year to date in EUR terms. It does not have significant direct UK exposure, with 33.4% in Spain, 26.3% in France and 13% in the Netherlands.
The second largest fund, the €713 million Lyxor STOXX European 600 Banks UCITS ETF (EN Paris: BNK) is up 6.9% year to date in EUR terms. It costs 0.30% and holds 32.8% in the UK, 15.2% in Spain and 11.9% in France.
A third option is the €390m SPDR MSCI Europe Financials UCITS ETF (LON: FNCL) and it is up 6.1% year to date. It costs 0.30% and tracks 89 banks, with almost a third (30.3%) in the UK, 12.3% in Switzerland and 11.5% in France.
Bank-focused ETFs covering the US have also provided healthy returns over 12 months and so far this year as they look forward to the effects of new President Donald Trump lowering tax and reducing regulation. The $229m SPDR S&P US Financials Select Sector UCITS ETF (LON: SXLF) is up more than 32% over 12 months in USD terms.
Cautious investors who are worried about Brexit might consider an ETF with a more diversified, global remit. The largest is the $244m db X-trackers MSCI World Financials Index UCITS ETF (Borsa Italiana: XDWF) which is up 3.5% year to date in EUR terms. Its ticker was delisted in London.