Scotland is a small country within the United Kingdom. Its economy is similarly small and highly dependent on its centuries-old alliance with England. Therefore, any exchange-traded funds (ETFs) that target Scotland are highly influenced by the rest of the U.K. and likely hold may securities for London-based firms.
Many ETFs or exchange-traded notes (ETNs) with exposure to Scotland actually track non-Scottish indexes, such as the FTSE 100 or FTSE 250. These indexes hold securities of major Scottish companies, such as the Royal Bank of Scotland (NYSE: RBS), Standard Life (SL) and Aberdeen Asset Management (FAP).
Investors can use ETFs to gain the diversification of a mutual fund combined with the intraday trading of an individual stock or bond.
iShares MSCI United Kingdom ETF
This is one of the most prominently traded U.K.-based ETFs. Based on the Morgan Stanley Capital International United Kingdom Index, the iShares MSCI United Kingdom ETF (EWU) has been around since 1996 and trades with an average daily volume just shy of 1 million trades.
Investors can lean on EWU for long-running and well-managed exposure to the entire U.K. market. Its largest holdings are mostly based in England, including HSBC (HSBC) and British Petroleum (BP). There are also some important Scottish companies present, such as GlaxoSmithKline (GSK) and the Royal Bank of Scotland.
EWU pays semi-annual dividends with a relatively high yield, has an expense ratio that hovers around 0.5% and has fairly inexpensive shares. This makes it an ideal ETF for investors who want some stable exposure to companies across the U.K.
The EWU was firmly in the spotlight of global ETF watchers during the 2014 debate for Scottish independence. It was widely believed that EWU would perform better after a "no" vote for the referendum, which proved to be true. This would not be a great play if the union between Scotland and the United Kingdom frayed again.
CurrencyShares British Pound Sterling Trust
Scotland, along with the rest of the U.K., uses the British pound sterling for currency (the U.K. rejects full integration into the European Union and the euro as a currency). The CurrencyShares British Pound Sterling Trust (FXB) is actually incorporated in the United States, but it is designed to track and replicate the performance of the pound sterling against the U.S. dollar.
FXB is a very stable fund, with a beta of 0.1% and low expenses. It makes an effective hedge in a possible inflationary environment for U.S.-heavy portfolios. It's a big but not enormous fund with relatively low trading volume, making it best-suited for a buy-and-hold strategy.
This fund is a currency-based trust; it does not hold the securities of any firms. However, the Scottish economy is tied to the strength of the pound sterling.
SPDR MSCI United Kingdom Quality Mix ETF
The SPDR MSCI United Kingdom Quality Mix ETF (QGBR) is another low-volatility value play with exposure to Scottish companies. It tracks the MSCI U.K. Quality Mix A-Series Index, which is a combo of three different MSCI indexes. Consequently, QGBR is high diversified and stable.
QGBR is offered by State Street Global Advisors as part of the popular SDPR series. It is a standard passive ETF with a gross expense ratio of 0.3% and a yield that hovers around 3.5%. However, the fund has only been around since mid-2014, making it much younger than many other U.K.-based ETFs. It is managed by the Global Equity Beta Solutions team.
No single stock comprises more than 5% of the total assets of QGBR. Top firms include HSBC, BP, Royal Dutch Shell Class A (RDS.A) and British American Tobacco (BTI). Even the sectors are well-distributed; consumer staples and financial services are the heaviest at 17%.
