Australia has always been a commodity powerhouse. The nation
is largely responsible for fueling many emerging markets' growth
stories with its enormous stockpiles of base metals, coal, and
agricultural products.
Yet despite the sparsely populated country's widespread
dominance of many commodity markets, it has been sorely lacking
in one area, oil. The country is the sixth biggest in the world
but has
oil production
that is barely in the top 30, needing over half a million barrels
of oil a day in imports.
This could be changing in the near future though, as a recent
massive shale oil discovery could dramatically alter this picture
and indeed the regional oil landscape. According to recent
surveys of the Arckaringa Basin, there could be
as much as 233 billion
barrels of oil trapped in the shale, worth as much as $20
trillion (see
Venezuela: The Next Black Swan for Oil ETFs?
).
If recoverable, this could make the vast shale deposit bigger
than what we see in the enormous Canadian (Alberta) oil sands and
easily get rid of Australia's oil import problem. However, it is
important to remember that this is in a remote location and that
all of the oil may not be easily-or cheaply recoverable.
Still, some are starting to grow optimistic over this
potential game changer. "What it could do is really turn this
thing into the next boom, so where you saw coal-bed methane
transform Queensland and the gas industry, shale could and I
think will transform South Australia and a potential oil boom."
Said Linc Energy CEO Peter
Bond in a recent interview
.
This trend could create a fresh bull market for Australia and
allow the nation to continue to play off of huge emerging markets
and their growth. This has proven to be a winning strategy for
the country in years past-both in terms of economic growth and
stock performance-so a continuation of this should be welcomed by
investors (see
Australia ETF Investing 101
).
While there are a few companies that U.S. investors can buy up
that target Australia, a more economical approach could be to
utilize
ETFs
instead. These funds offer broad exposure across the market and
could be ideal ways to play a continued boom in materials.
Additionally, they could also offer up some exposure to
consumer firms, which could see a gain should the hydrocarbon
boom trickle into these segments as well.
Due to these factors, we feel like any of these Australia ETFs
highlighted below could be interesting picks for long-term
investors seeking to get in to a country that has the potential
for a new commodity boom:
iShares MSCI Australia Index Fund (
EWA
)
This is easily the most popular Australian ETF on the market
with more than $2.5 billion in AUM. It is also the cheapest,
charging investors just 52 basis points while holding 70 firms in
total.
Financials account for about 40% of assets, while basic
materials make up another 20%. Consumer staples and real estate
combine for another 17% of EWA leaving little for utilities,
discretionary firms, or telecoms (see
11 Great Dividend ETFs
).
The ETF also decidedly has a large cap focus with over 80% of
assets going towards this segment. Still, the fund has a robust
yield of 4.1% in 30 Day SEC terms, so it could be a yield
destination as well for some investors.
WisdomTree Australia Dividend Fund (
AUSE
)
In a distant second in terms of popularity is AUSE, a dividend
focused ETF that has about $70 million in AUM. The fund costs
about 58 basis points a year but has a similar amount of
securities as EWA, despite tracking the WisdomTree Australia
Dividend Index.
This gives the product, surprisingly, a more spread out
profile with financials and consumer cyclical stocks each making
up about 20% of assets. Three other segments-industrials,
consumer staples, and materials-also make up double digits as
well (see
Developed Asia Pacific ETF Investing 101
).
Mid caps are more of a focus in this ETF, though this, along
with low volume, promotes a wide bid ask spread most of the time.
However, the yield of nearly 4.5% in 30 Day SEC terms is quite
impressive, especially for such a well-spread out fund.
IQ Australia Small Cap ETF (
KROO
)
Another Australia pick is KROO, a fund that follows the IQ
Australia Small Cap Index, holding about 100 stocks in its
basket. For this exposure, investors pay about 69 basis points,
though not many have embraced it so far as total AUM is below $20
million.
Still, the ETF is arguably the best bet to benefit from a
shale boom thanks to just a 5% allocation to financials, and a
28% holding in industrials. Beyond those two, consumer
discretionary and energy firms make up another 30% suggesting a
still well-spread out profile, albeit tilted towards the broad
industrial economy.
Small caps account for roughly 50% of the portfolio, with the
rest going towards mid cap securities. This focus, along with low
AUM, helps to push volume low and bid ask spreads wider, so total
costs could be in excess of the stated expense ratio (read
Australia ETFs: A Developed Market Play on Asian
Growth
).
This factor, along with the smallest dividend yield to offset
the expenses, easily makes KROO the most expensive on the list, a
factor that investors will definitely have to take into account
before making their final selection.
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@Eric
Dutram
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WISDMTR-AUS DVD (AUSE): ETF Research Reports
ISHARS-AUSTRAL (EWA): ETF Research Reports
IQ-AUSTRALIA SC (KROO): ETF Research Reports
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