As UK Banks Hike Mortgage Rates, These ETFs Stand to Gain

The UK housing market has taken a surprising turn recently, with central bank policy and major lenders moving in different directions. While the Bank of England (BoE) has opted to hold interest rates steady at 3.75%, high street lenders such as HSBC, NatWest, Barclays and Nationwide have independently raised their mortgage rates.

While these hikes put immediate pressure on the pockets of individual borrowers like new homebuyers, they create a unique tailwind for specific equity sectors like financial. 

As this environment creates potential upside for equities and, by extension, exchange-traded funds (ETFs) that hold them, which are sensitive to UK mortgage profitability, investors may want to add them to their watchlist.

Before suggesting ETFs that stand to gain from increased mortgage rates, let us delve deeper into the specific industries and the stocks within them that may see renewed profitability. This will help you make a more informed decision and identify strategic investment approach.

Industries & Stocks to Benefit

The direct beneficiaries of rising mortgage rates are the UK's major retail banks and building societies. These institutions can earn wider net interest margins — the difference between what they pay savers and what they earn from loans. Below are key publicly traded companies and industry segments likely to benefit from the current dynamics, including those that trade as depositary receipts in the United States:

Banking: As mortgage lenders repriced upwards, giants like HSBC Holdings HSBC, Barclays Plc BCS, and NatWest Group NWG stand to benefit from higher lending spreads.

Housebuilding: While higher rates can dampen demand, builders like Berkley Group BKGFY are being watched closely. If rates stabilize at these higher levels, it often provides the market with much-needed "certainty," encouraging sidelined buyers to finally commit.

The ETF Advantage

For many investors, picking a single winner in a volatile rate environment might be risky. This is where ETFs offer a strategic advantage. Instead of exposure to the idiosyncratic risks of one company (like a specific bank’s bad debt), an ETF provides broad diversification across the entire sector. This "basket" approach allows investors to capture the collective upside of rising lending margins or a resilient housing market while smoothing out the volatility of individual stock price swings.

ETFs also offer greater liquidity and typically have lower management fees than actively managed funds. This makes them an efficient tool to capitalize on sector-wide trends, such as improved bank profitability from higher lending rates.

ETFs to Watch

Considering the aforementioned discussion, you may add the following ETFs in your watchlist:

iShares MSCI United Kingdom ETF EWU 

This fund, with net assets worth $3.02 billion, offers exposure to 73 large and mid-sized companies in the United Kingdom. HSBC holds the first position in this fund, with 9.46% weightage, while BCS holds the 10th position with 2.82% weightage. 

EWU has rallied 29.7% over the past year. It charges 50 basis points (bps) as fees. The fund traded at a good volume of 1.70 million shares in the last trading session. 

Franklin FTSE United Kingdom ETF FLGB

This fund, with net assets worth $970.8 million, offers exposure to 98 UK large and mid-capitalization stocks. HSBC holds the first position in this fund, with 9.09% weightage, while BCS holds the 10th position with 2.70% weightage. NWG holds the 14th position in FLGB, with 2.16% weightage.

FLGB has risen 28.8% over the past year. It charges 9 bps as fees. The fund traded at a volume of 0.06 million shares in the last trading session.

Invesco MSCI Green Building ETF GBLD

This fund, with net assets worth $5.61 million, offers exposure to 104 companies that remain involved in the design, construction, redevelopment, retrofitting, or acquisition of green-certified properties to promote mechanisms for raising capacity for effective climate change mitigation and adaptation. BKGFY holds the 13th position in this fund, with 1.92% weightage.

GBLD has gained 16.3% over the past year. It charges 39 bps as fees. The fund traded at a volume of 0.005 million shares in the last trading session. 

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This article originally published on Zacks Investment Research (zacks.com).

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