Is Rising Debt Alarming for Australia ETFs?
Amid global growth slowdown and volatile markets, Australia belongs to an elite group of countries with AAA rating. However, the sustainability of the country's AAA rating is now in doubt after the rating agency Moody's issued warnings that the country would be at risk of a downgrade if there are no measures taken to increase revenue considering its mounting debt. Moody's stated that taxes need to be increased because of inability of government to cut spending enough to keep up with government debt (read: Top and Flop Country ETFs of Q1).
Australia’s government debt, which was 11.6% of GDP about 10 years back, has climbed to 35.1% of GDP in fiscal 2015. Moody’s expects debt to increase to 38% of GDP in fiscal 2018.
Moody’s is not alone in considering a rating downgrade for Australia. Earlier, the other two agencies, Fitch and Standard & Poor’s, had commented on the same. A high credit rating helps to keep the cost of public debt low.
While on the one hand, threat to Australia’s credit rating looms large, on the other, the country is headed for a double dissolution on July 2. The Australian Prime Minister Malcolm Turnbull intends to ask the governor general to dissolve the parliament after the budget announcement scheduled to be held on May 3, 2016. This doesn’t come as a surprise as Australia's upper house, the Senate, rejected labor reform bills aimed at curbing union corruption in the building and construction industry yet again (read: Australia ETFs in Focus on Likely Snap Elections).
Given the heightened political uncertainty and increasing debts, investors may want to take a closer look at the ETFs targeting this nation.
ETFs in Focus
iShares MSCI Australia ETF (EWA)
EWA tracks the MSCI Australia Index and holds 73 stocks in its basket. The top two firms have one-fifth allocation while other firms hold less than 6.3% share in the basket. From a sector look, financials dominates the fund’s return at 52.4% followed by materials (13.8%). This fund has AUM of $1.6 billion and average daily volume of more than 3.2 million shares. It charges 47 bps in annual fees and has gained 6.2% so far in the year (as of April 18, 2016). It has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook (read: Most Vulnerable Asia-Pacific ETFs on China Issues).
WisdomTree Australia Dividend Fund (AUSE)
This fund follows the WisdomTree Australia Dividend Index. It has AUM of $34.3 million and trades in paltry volume of 2,500 shares a day on average. Expense ratio comes in at 0.58%. Holding 62 stocks in its basket, the product is widely diversified across each component as none of these holds more than 3.8% of assets. Sector-wise, it has a definite tilt toward financials at 22.2%, followed by materials (16.2%), industrials (14.8%) and consumer discretionary (14.6%). The fund has gained 11.8% so far this year and has a Zacks ETF Rank of 3 with a Medium risk outlook.
iShares Currency Hedged MSCI Australia ETF (HAUD)
This ETF tracks the MSCI Australia 100% Hedged to USD Index and invests primarily in EWA with currency hedge tacked on. The fund has accumulated $9.6 million in its asset base since its inception and charges 51 bps in annual fees. Volume is paltry as it exchanges 6,000 shares on an average daily basis. It has lost 5.9% so far this year. The fund has a Zacks ETF Rank of 3 (see all Asia-Pacific Developed ETFs here).
SPDR MSCI Australia Quality Mix ETF (QAUS)
This fund tracks the MSCI Australia Quality Mix A-Series Index. It has a basket of 76 stocks with the top firm having an exposure of almost 7.6%, while the rest of the firms have less than 5.6% weight. Here again, financials takes the top spot at 38.9% while materials and consumer staples round off the next two positions with double-digit exposure each. QAUS has AUM of only $9.5 million and average daily volume of around 1,400 shares. Expense ratio comes in at 0.30%. The fund has gained 5.7% in the year-to-date timeframe and has a Zacks ETF Rank of 4 or ‘Sell’ rating with a Medium risk outlook.
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ISHARS-AUSTRAL (EWA): ETF Research Reports
WISDMTR-AUS DVD (AUSE): ETF Research Reports
ISHARS-CHM AUST (HAUD): ETF Research Reports
SPDR-MSCI AQM (QAUS): ETF Research Reports
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