Australia ETFs in Focus after Elections - ETF News And Commentary

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Australia has enjoyed economic expansion for almost 20 years now. Before the global financial crisis hit the country, Australia was in a decent situation financially, thanks mainly to its extensive reserves of natural resources and effective governance.  (Read: A Closer Look at New Zealand and Australia ETFs ). The economy grew at an average annual rate of 3.8% during 1995-2004.

Australia's Reserve Bank slashed interest rates to record lows in response to the intensifying financial crisis. The nation came through the global recession relatively unscathed. However, stimulus spending schemes by the Labor government led the country into deficit. (Read: Time to Buy the Australian Dollar ETF? ).

What's happening now?

For a long period the economy experienced sturdy growth, but the growth in recent times has been more sluggish. This is mainly due to a fall in iron-ore demand from the country's largest importer China.

While some analysts still fear that the economy may crash, we received some good news on the economic front. The Australian economy recorded moderate growth in the first quarter; however with the Q2 results in place the country is slowly picking momentum.

According to the Australian Bureau of Statistics, GDP rose 0.6% in the second quarter, from the previous quarter when it rose 0.5%. This marks 22 years of consecutive growth for the Australian economy. The IMF expects the economy to expand by 3.0% and 3.3% in 2013 and 2014.

Can Tony Abbott's Presidential Election attract investors?

Mr. Abbott has ended the six years of rule by the Labor party led by ex-president Mr. Rudd. With Mr. Abbott taking the seat, his top priorities include expanding infrastructure, reducing government spending, abolishing tax on carbon emissions and mining and restricting the flow of asylum seekers.

The new administration has also promised some tax incentives to the mining industry as well as manufacturers. This in turn could bring in more business opportunities in the country and help the big miners. Given Abbott's presidential victory, and his pledge to the Australian economy, investors are likely to take advantage of the situation.

Investor Options

Investors who wish to place their bets in the improving economy of Australia may play the ETFs listed below:

iShares MSCI Australia Index Fund ( EWA )

Investors might find iShares EWA an interesting choice to play on Australia. Launched in March 1996, the product has amassed a huge asset base of $1.96 billion.  It is the oldest and the most popular ETF in the region with a focus on large caps. The fund seeks to replicate the performance of the MSCI Australia Index, before fees and expenses.

The product holds 70 securities in the basket and puts around 61% of assets in the top ten firms, with Commonwealth Bank of Australia, BHP Billiton and Westpac Banking Corp. taking the top three spots. The trio takes almost a 31% share in the basket.

Financials accounts for about 50% of assets, while Materials makes up another 18%. Consumer Staples and Energy combine for another 15% of EWA leaving little room for Industrials, Utilities, Discretionary firms, or Telecoms.

The fund is liquid as it trades in good volume of more than 2 million shares a day on an average. This suggests that there is no extra cost involved in the fund beyond the expense ratio of 0.50%. The ETF delivered returns of 10.31% for the one year period ended  June 30.

Further, EWA yields a high dividend of 6.09% per annum (read: 4 Excellent Dividend ETFs for Income and Stability ). As a result, this product could be a yield destination for some investors.

WisdomTree Australia Dividend Fund ( AUSE )

Launched in June 2006, AUSE comes second in terms of popularity, with an AUM of $61.7 million, and tracks the WisdomTree Australia Dividend Index. This ETF can be an interesting option for investors seeking current income, especially due to its diversified portfolio of dividend paying stocks.

In terms of market capitalization, the product is tilted towards mid-cap stocks (55%), while large-cap stocks take the rest. Thus, it provides a pure play in dividend paying income stocks of the Australian equity markets.

The product is well diversified across 63 securities with just around 28% in the top ten holdings. National Australia Bank, Westpac Banking Corp. and Mineral Resources Ltd. take the top 3 spots. Financials leads the sector with 20% allocation, while Consumer Discretionary, Industrials, Materials and Consumer Staples take double digit allocation in AUSE (read: Do Country ETFs Really Provide Diversification? ).

The ETF is slightly expensive relative to its counterparts, as it charges 58 bps in fees per year from investors. In addition, low volume (8,800 shares a day) results in a wide bid ask spread for the fund.

The product has returned 11.37% as of June 30 for a one-year period. Moreover, the fund also gives an attractive dividend yield of 4.22%.



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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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