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ETF Specialist

A Least-Bad Option for Foreign Developed Equity Exposure

Large-cap U.K. stocks have good exposure to faster-growing emerging markets, have a defensive tilt, and are trading at attractive valuations.

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While we usually recommend using single-country funds as satellite holdings given their niche exposure, we think  iShares MSCI United Kingdom Index (EWU) is suitable as a core foreign-equity holding.

First of all, this fund is dominated by high-quality global firms such as  Vodafone (VOD),  British American Tobacco (BTI),  HSBC (HBC), and  GlaxoSmithKline (GSK). In fact, large-cap U.K. equities (in pound sterling) are actually less volatile than large-cap U.S. equities. Second, over the past 15 years, EWU has provided slightly better diversification benefits relative to the broader MSCI EAFE Index (which includes developed Europe and Asia), perhaps because the U.K. equity market tends to be more defensive, with heavier weightings in energy, consumer staples, and telecoms, relative to the S&P 500. We also note that this fund has been less volatile than the MSCI EAFE Index.

Patricia Oey has a position in the following securities mentioned above: EWU. Find out about Morningstar’s editorial policies.