When most investors think of developed nations, they usually consider the likes of Canada, ones in Europe, or Japan. However, this leaves out two often-overlooked countries that can provide investors with great gains and slightly lower correlation levels, Australia and New Zealand.
These markets offer up great commodity exposure and the inside track to huge Asian markets like China and Indonesia. Furthermore, both have interest rates that are much higher than the U.S. or Japan, so not only do these countries have more flexibility, but they could be better positioned for shocks in the near term as well.
Fortunately, both of these countries can easily be played with ETFs. Below we have highlighted a brief bit about each of these two overlooked markets and some exchange-traded choices to play them.
Australia has enjoyed more than 20 years of continuous growth, though at a slower pace in recent years. The economy maintains a favorable balance of trade, strong per capita income (one of the highest in the world), low unemployment, low budget deficit and high levels of economic freedom. The country has always been a commodity powerhouse and major exporter of commodities – base metals, coal and agricultural products.
Despite this sparsely populated country’s widespread dominance of many commodity markets, Australia has been deeply lacking in one area, which is oil. However, a recent massive shale oil discovery could dramatically alter this scenario (read: Australia ETFs to Play the Coming Shale Boom). Investors seeking exposure to the country might take advantage of this coming shale boom and could make a play on the region.
iShares MSCI Australia Index Fund (EWA)
Investors might find iShares’ EWA an intriguing choice to make a play on Australia. With AUM of $2.5 billion, this is the oldest and the most popular ETF in the region with focus on large caps. The fund seeks to replicate the performance of the MSCI Australia Index, before fees and expenses.
The product holds 71 securities in the basket and does not spread well across individual assets. It puts around 61% of assets in top ten firms, with BHP Billiton (BHP), Commonwealth Bank of Australia and Westpac Banking (WBC) taking the top three positions.
Financials account for about 48% of assets, while basic materials make up another 22%. Consumer staples and energy combine for another 15% of EWA leaving little room for utilities, discretionary firms, or telecoms.
The fund is liquid as it trades in good volume of more than 2 million shares a day on average. This suggests that there is no extra cost involved in the fund beyond the expense ratio of 0.51%. The ETF delivered robust annual returns of 21.6% last year and gained over 4.8% in the past three months.
Further, EWA yields a high dividend of 5.23% 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)
This fund comes second in terms of popularity, with AUM of $73.7 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.
Furthermore, stocks in AUSE are spread across the entire spectrum of market capitalization levels without a particular bias towards large caps. Thus it provides a pure play in the dividend paying income stocks in the Australian equity markets.
The product is well diversified across 65 securities with just around 32% in top ten holdings. Seven West Media (SWM), Tabcorp Holdings (:TAH) and Westpac Banking make up for a combined 12% share. The fund is tilted towards financial and consumer discretionary sectors, each making up above 20% of AUSE (read: Do Country ETFs Really Provide Diversification?).
While the fund largely focuses on mid caps with 54% share, large caps account for 44% of assets. The ETF is quite expensive relative to its counterparts, as it charges 58 bps in fees per year from investors. In addition, low volume promotes a wide bid ask spread for the fund. The fund has returned nearly 21% last year and 7.15% in the past three months. It currently pays a dividend yield of 4.21%.
New Zealand has always been an attractive destination for investors seeking international diversification given its small size and strategic geographic location. Low levels of unemployment, favorable foreign investment policies, and lower tax rates, are some of the key positives that attract some investors toward New Zealand.
Beyond this, the country has little exposure to the European issues and an uncertain U.S. economy. Lastly, the country’s isolation makes it relatively immune while its commodity profile is somewhat unique compared to many other developed markets.
iShares MSCI New Zealand Investable Market Index ETF (ENZL)
This ETF is the only product that provides a pure play in the New Zealand equities. Launched in September 2010, ENZL tracks the MSCI New Zealand Investable Market Index, giving investors exposure to 22 stocks. The product has an asset base of $171.3 million and trades in volume of about 55,000 shares per day, charging investors 53 bps in annual fees.
The fund is not widely spread across individual securities and sectors. It puts nearly 76% of the assets in the top 10 holdings. Fletcher Building, Telecom Corporation of New Zealand and Auckland International take the top three positions that make up for a combined 43% share.
From a sector perspective, materials, telecom and industrials combine to take up more than three-fifths of the assets, suggesting a heavy sector concentration.
The fund provides exposure to large cap blend stocks which are well-known for their high yields, suggesting that this ETF will probably have a high dividend focus for the years to come. The ETF currently pays 4.35% in dividend per annum.
In terms of performance, ENZL has crushed not only American markets, but their counterparts in Australia as well (represented by EWA and AUSE). In total, ENZL produced more than 29% last year and has added about 4.7% in the past three months (read: 3 Developed Market ETFs Crushing American Stocks).
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