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Australia ETFs Offer Some Rebound Potential


The Australian dollar is the second-worst performing developed market currency in the world this year behind the yen, a fact affirmed by the 13.7% tumble by the CurrencyShares Australian Dollar Trust (FXA) . In theory, the weakening Aussie should have been good news for stocks in the export-heavy country.

That has not been the case. At least not for the major ETFs tracking Australian equities. The iShares MSCI Australia ETF (EWA) is down 9% while the WisdomTree Australia Dividend ETF (AUSE) is down 5.23%. [Dark Clouds For Australia ETFs?]

The good news is the weak Aussie may finally be starting to bear fruit for stocks in the world’s 12th-largest economy as the S&P/ASX 200 is up 3.6% in the past month. Over the same time, FXA is off 5.5%, indicating that the stocks that call AUSE and EWA home may be responding to the falling Aussie positive fashion. [ETF Chart of the Day: Australia]

Previously identified beneficiaries of a weak Aussie include Westfield, News Corp, QBE Insurance and Brambles. News Corp. is not a member of EWA’s lineup, but the other stock’s combine for 5.8% of the ETF’s weight. AUSE, home to 65 stocks and a 3.95% 30-day SEC yield, allocates about 4% of its combined weight to Westfield, QBE Insurance and Brambles.

Other stocks that make for more predictable beneficiaries of a slumping Australian include BHP Billiton (BHP), the world’s largest mining company, and Woodside Petroleum, Australia’s second-largest oil company.

Woodside Petroleum’s two key products, oil and LNG, are both priced globally in USD, with dividends being converted to Australian dollars. Woodside reported a net profit after tax of US$2.98 billion for the year in 2012 and is likely to benefit strongly from the 11% decline in the Aussie dollar, according to Motley Fool Australia.

BHP is EWA’s second-largest component at a weight of 10.3% while Woodside accounts for 2.4% of the ETF’s weight. Another winner under the falling Aussie scenario is another stock that is found in both AUSE and EWA. Macquarie, Australia’s largest investment bank, could increase its earnings 1.4% for every one cent AUD/USD drops because the bank derives nearly two-thirds of its revenue from outside of Australia, according to Investing.com.

Both ETFs feature financial services as their largest sector weights, but shareholders of EWA are more levered to that sector because the ETF devotes almost 51% of its weight to that industry group. That says if Australian banks can do more business overseas, particularly in the U.S., EWA, with a 30-day SEC yield of 4.3%, stands to benefit.

iShares MSCI Australia ETF

ETF Trends editorial team contributed to this post.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.