Investors Reassess International ETFs After U.K. Politics

Developments in U.K. politics have prompted investors and advisers to review holdings in developed-market equity ETFs that exclude the United States. The Vanguard FTSE Developed Markets ETF (VEA) holds roughly 13% in U.K. equities, the iShares Core MSCI EAFE ETF (IEFA) about 15%, and the WisdomTree Europe Hedged Equity Fund (HEDJ) excludes U.K. stocks while hedging euro exposure to the U.S. dollar.

VEA tracks the FTSE Developed All Cap ex US Index and covers about 3,900 companies across market-cap sizes. The fund includes Canadian firms and treats South Korea as a developed market, producing exposure to North America and East Asia.

IEFA follows the MSCI EAFE Investable Market Index, which excludes Canada and classifies South Korea as an emerging market. IEFA concentrates on Europe, Oceania and parts of Asia outside South Korea.

Those index rules lead to differences in country weights. Both funds allocate double-digit shares to U.K. equities-near 13% in VEA and near 15% in IEFA-creating exposure to U.K. company performance, the British pound and any regulatory or fiscal policy changes originating in the U.K.

HEDJ targets dividend-paying exporters in the Eurozone and omits non-euro countries, including U.K. firms. The fund hedges euro returns back to the U.S. dollar, removing direct stock exposure to the U.K. and limiting the impact of euro-dollar currency moves on returns.

Advisers and portfolio managers commonly use VEA and IEFA as core holdings for developed-market allocations outside the U.S. Funds with similar names can have materially different country weights, index methodologies and currency treatments.

FTSE and MSCI apply different country classifications: FTSE counts South Korea as developed and includes Canada in its ex-U.S. developed index; MSCI classifies South Korea as an emerging market and excludes Canada from its EAFE series. Those classification differences affect sector and country weightings in benchmarked ETFs.