A Member of Pat McKeough’s Inner Circle recently asked for his advice on a company that invests in a broad range of 27 companies domiciled, or headquartered, in the Republic of Ireland.

Pat feels the high weighting in the two top stocks adds risk although the overall outlook for the Irish economy is strong. However, Brexit—the U.K. plan to leave the EU— poses the biggest risk for Ireland and this ETF and adds a high level of uncertainty for investors.

Q: Can you please give me your views on EIRL (iShares MSCI Ireland ETF)? Thanks in advance!

iShares MSCI Ireland ETF, (Symbol EIRL on New York, www.ishares.com/us), invests in a broad range of Irish stocks. All the companies within the ETF are domiciled or headquartered in the Republic of Ireland as opposed to Northern Ireland, which continues to be a part of the U.K.

The $58.3 million fund started up in May 2010. Its MER is 0.50%.

The ETF holds 27 stocks. The top stock holdings are CRH plc (building materials), 23.2%; Kerry Group (food ingredients), 16.1%; Paddy Power Betfair plc (betting/bookmaking), 5.4%; AIB Group (financial services), 4.8%; Smurfit Kappa Group plc (packaging), 4.7%; Glanbia plc (food/nutrition), 4.8%; ICON plc (drug development services), 4.5%; Kingspan Group plc (building materials), 4.6%; Bank of Ireland Group, 4.3%; and Grafton Group plc (building), 3.4%.

The high weighting in the two top stocks—representing 39.2% of total assets—adds risk. Still, both companies are sound with a positive outlook for 2019 and beyond.

The overall outlook for the Irish economy is strong. After a severe property crash a decade ago, it’s now one of Europe’s fastest-growing economies. But Brexit—the U.K. plan to exit the EU—is a big risk for Ireland and this ETF. The central issue is the “Irish backstop,” a key point of contention in the U.K.’s withdrawal agreement from the EU.

ETFs: What Brexit could mean for the Irish economy and its businesses

The backstop arrangement was agreed to by both the U.K. government and EU in November 2018 as part of the draft withdrawal agreement. However, that draft deal has so far been rejected by the U.K. Parliament.

The backstop ensures an open border between the European Union’s Republic of Ireland and the U.K.’s Northern Ireland. As a result, part of the U.K. could remain in the European customs union and economic regime for some time, even after the U.K. withdraws from the EU. The backstop is meant to give the U.K. and the EU enough time to negotiate a new trade agreement while maintaining the current open border between Ireland and Northern Ireland.

Given the violent history between the two, the compromise was seen as necessary to prevent the return of a divided island. But the Irish backstop, which many hardline pro-Brexiteers find unacceptable, threatens to upset the negotiated withdrawal deal.

As it stands now, if a withdrawal agreement isn’t signed before the end of March 2019, that would result in a so-called “no deal” Brexit—without any Irish backstop arrangement.

This could have a negative impact on the Irish economy. Ireland’s close trade and financial ties with the U.K. mean Britain’s departure from the European Union poses a greater threat to Ireland’s economy than to any of the other 26 remaining members of the bloc.

However, it now seems increasingly likely that the U.K. House of Commons would support Prime Minister Theresa May’s Brexit deal if the backstop is replaced with alternative arrangements to prevent a hard border with Northern Ireland.

The EU will likely have to compromise on the backstop deal. A “no-deal Brexit” would almost certainly lead to a hard border—so paradoxically the backstop may bring about exactly what it is designed to prevent. In the end, the solution will probably lie in using technology to carry out border checks and controls.

Recommendation in Pat’s Inner Circle: iShares MSCI Ireland ETF is a hold, but only for aggressive investors willing to accept the uncertainty surrounding Brexit and Ireland’s trade prospects with the U.K.