Given the United Kingdom’s superior long-term growth profile and favourable demographics, we would expect the Hamilton Capital Global Bank ETF (HBG; TSX) to – over time – have an allocation to U.K. banks of between 5 and 7%, including the ‘challenger’ banks. That said, since the fund was launched, the portfolio weighting to U.K. banks has been closer to 3% as we seek to reduce the fund’s exposure to the unquantifiable event risk of “Brexit”.

For much of the past few months, the polls have shown the “Remain” leading and the risks relatively low. However, in the past several weeks, the risk of Brexit has been rising as poll trackers show the “Leave” gaining ground, and in some instances leading. At the same time, although polls are showing the race tightening and the short-term market risk of a “Leave” vote apparently rising, CDS spreads have been falling.

Put differently, the fixed income markets do not appear to believe, or place significant weight on, the recent polls. The FTSE has been relatively stable in the past three months at ~6,200, also implying a degree of complacency. Therefore, in our view, with the referendum approaching later this month, the short-term risk of a negative surprise is rising.

As a result, we remain notionally underweight U.K. banks.

Note: Comments, charts and opinions offered in this commentary are produced by Hamilton Capital and are for information purposes only. They should not be considered as advice to purchase or to sell mentioned securities. Any information offered is believed to be accurate, but is not guaranteed.