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Australia's Strong Q1 Growth: ETFs in Focus

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The Australian economy remained strong in the first quarter of 2018 with GDP growth of 3.1% compared to 2.4% in the last quarter of 2017. The reported growth was above expectations of 2.8% expansion and marked the quickest annual growth rate since second-quarter 2016.

The Australian Bureau of Statistics (ABS), has forecast consistent growth in 2018 on account of higher corporate profits, increase in exports and government revenues. Data have illustrated that commodity exports were the key drivers of growth in the March quarter.

Upbeat Data

Australia has recorded a massive trade surplus of $4 billion compared to a trade deficit of $1 billion in the last quarter of 2017. Government consumption expenditure went up by $1.3 billion or 1.6% which has added approximately 0.3 percentage points to Q1 results. Corporate profits have increased 5.9% quarterly, surpassing expectations for a 3.0% rise, due to strong performance by the mining sector. Business inventories grew in utilities, wholesale trade and manufacturing by 4.1%, 3.5% and 0.5%, respectively (read: How is the Current Trade Scenario Impacting Asia ETFs?).

Economic fundamentals

Australia being a resource-rich economy, has been witnessing solid growth lately thanks to a pickup in the gas industry, solid commodity prices and low levels of interest rates. The country is expected to grow above 3% in this year and the next as suggested by the Reserve Bank of Australia.

Exports of goods have grown by 2.9% driven by mining commodities. Infrastructure development in the transportation sector has boosted tourism and pumped up government revenues. China, the biggest trading partner of Australia, has also consumed record volume of iron-ore which has enhanced its export business. Spending in healthcare has increased and public sector growth looks steady. 

However, household consumption (representing 57% of GDP) has remained weak though it grew by 0.3% in the quarter. Several factors, were responsible for the weakness which include tough lending regulations, low wage growth and high household debt. Consumer spending slowed down in some areas. Spending on insurance, transport, health care and utilities have grown while slowdown was observed in housing along with food and beverages (read: Housing ETFs to Buy in 2018).

Employment growth has slowed down as data from ABS revealed that only 52,900 jobs were created in the first quarter. The slowdown in employment is a result of a spike in the number of Australians entering the labor force, which have shot up the unemployment rate to 5.6%. Wage growth has slowed down on account of larger participation of the workforce and a competitive market. Annual growth in vacancies was lower at 9% from 12.1% in March.

Though the economy still has to go a long way, the latest signs of improvement make it necessary to have a look at the below-mentioned funds.

ETFs in Focus

iShares MSCI-Australia ETF EWA

The fund tracks the performance of the MSCI Australia Index. It has an expense ratio of 0.49% and has an asset base of $1.5 billion. The fund has an average daily volume of traded shares of 2.2 million. It has 68 stocks in its basket. As for individual holdings Commonwealth Bank, BHP Biliton and Westpac Corporation are the top three allocations, with none holding more than 10%. Financials, Materials and Health Care are the top sector exposures with weights of 37.8%, 18.9% and 9%, respectively. The fund has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

WisdomTree Australia Dividend Fund AUSE

The fund has exposure to Australian equities and high dividend yield companies, and tracks the WisdomTree Australia Dividend Index. It has an asset base of $34.3 million and daily average trade volume stands of 3130 shares. The fund has 66 holdings in its portfolio. Tabcorp Holdings, Harvey Norman and Macquarie Group comprise the top three individual allocations with none holding more than 4%. As for sector outlook, Financials, Consumer Discretionary and Materials are the top exposures with weights of 22.6%, 16.5% and 14.1%, respectively. It charges an annual fee of 58 basis points and has a Zacks ETF Rank #3 with Medium risk outlook (read: Will EM & Asia Outperform U.S. ETFs in the Year of Dog?).

Franklin FTSE Australia ETF FLAU

The fund has exposure to large- and mid-sized companies in Australia and tracks the performance of the FTSE Australia RIC Capped Index. It has a nominal expense of 9 basis points annually and comprises 95 holdings in its basket. The fund has an AUM of $3.9 million with average daily volume of shares traded at 8835. In terms of individual allocations, Commonwealth Bank, BHP Biliton and Westpac Banking Corp are the top three holdings with none holding more than 9%. As for sector outlook Financials, Materials and Healthcare comprise the top three with 36.2%, 19.7% and 8.8% weight, respectively.

First Trust Australia AlphaDEX Fund FAUS

The fund seeks investment results of the NASDAQ AlphaDEX Australia Index. It has 40 holdings in its portfolio and an asset base of $1.7 million. The average daily volume of trade is 180 shares and expense ratio is 0.8%. It has 40 stocks in its basket. Materials, Real Estate and Energy have been the dominating sectors in this fund with weight of 26.00%, 20.61% and 15.94%, respectively. Individually, Whitehaven Coal, BlueScope Steel and Seven Group comprises the top stocks with none holding more than 5%.  The fund has a Zacks ETF Rank #3 with Medium risk outlook.

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ISHARS-AUSTRAL (EWA): ETF Research Reports
WISDMTR-AUS DVD (AUSE): ETF Research Reports
FT-AUSTRALIA (FAUS): ETF Research Reports
FL-FTSE AUSTRAL (FLAU): ETF Research Reports
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