Depending on who you ask, you might hear that Britain is headed for a technical recession with the pound sinking even more in value relative to the dollar—or that the country is poised for economic growth following Brexit. Throughout 2017, the currency’s value versus developed countries continued to weaken following new lows reached in 2016. As of September 19, 2018, it stands at around $1.31, not far from where it stood throughout 2018, briefly topping $1.42 in April, but otherwise showing little movement.
As such, the currency's relative weakness may provide an attractive entry point for investors willing to wait out the economic turmoil and bet on a recovery. If you are considering adding exposure to the British pound, these three exchange-traded funds (ETFs) may be a good place to start. (For related insight, read more on what every forex trader needs to know about the British pound.)
Note: Funds were chosen based on currency exposure and performance. All data is accurate as of September 19, 2018.
1. Invesco CurrencyShares British Pound Sterling (FXB)
- Issuer: Invesco
- Assets under Management: $157.62 million
- 2017 performance: 9.10%
- 2018 YTD performance: -4.18%
- Expense ratio: 0.40%
- Price: $127.49
FXB is one of two major players in the British pound space offering investors pure exposure to the British pound sterling. At a cost of 40 basis points, FXB employs the simple strategy of holding physical pounds on deposit, albeit in an uninsured deposit account at JPMorgan Chase & Co. The fund has good liquidity and tight spreads, making it easy to trade for even small investors. (For related insight, read about the bearish run for British pound ETFs.)
This fund pays monthly distributions. Therefore, it is important to note that tax efficiency is an issue with FXB – all gains and distributions are treated as normal income for tax purposes. Performance wise, the fund performed well in 2017 but has struggled in 2018. The one-year return has changed little, down just 0.08%. The longer term has been weaker for the fund, with a three-year return of -5.79% and a five-year return of -3.84%.
2. VelocityShares Daily 4x Long GBP vs USD ETN (UGBP)
- Issuer: CitiGroup
- Assets under management: $3.50 million
- 2017 performance: N/A
- 2018 YTD performance: -18.75%
- Expense ratio: 1.50%
- Price: $36.14
UGBP is a newer fund, launched December 12, 2017. The fund is designed to provide four times leveraged exposure to the changes in the spot exchange rate between the British pound and the U.S. dollar, rebalanced daily. With a smaller asset base than FXB, it comes with greater trading risk. Average daily volumes are around 1,676 shares, so liquidity can be problematic. Moreover, as is the case with FXB, gains from UGBP are taxed as ordinary income.
This fund is structured as an exchange-traded note (ETN), which is a debt security, and it carries all the risks associated with Citigroup as the issuing bank, so it is wise to tread carefully if you are thinking of jumping in. YTD this fund has posted a decline of 18.75%. As the fund is less than one year old, there are no long-term statistics to consider.
3. ETFS Short NZD Long GBP (NZGB.L)
- Issuer: Barclays Bank
- Assets under management: GBP59,180
- 2017 performance: 7.38%
- 2018 performance: -2.86%
- Expense ratio: 0.39%
- Price: GBP3,141
In the U.K. ETF Securities (ETFS) also offers a comprehensive list of ETFs allowing investors to take various positions on the British pound. In 2017, its top performing fund was the ETFS Short NZD Long GBP fund. This fund had a 2017 YTD return of 7.38% but has been flat to lower so far in 2018.
This fund uses an index replication strategy linked to the MSFX Short New Zealand Dollar/GBP Index. By taking the short position on the New Zealand dollar and long position on the British pound, it seeks to benefit from a strengthening GBP versus the NZD. Holdings in the fund include unfunded swaps with a counterparty. Daily cash payments between ETFs and the counterparty are transacted based on the fund’s holdings and values of the underlying instruments.