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Reserve Bank of New Zealand Holds Rates: ETFs in Focus

Zacks Equity Research

New Zealand’s central bank held its key rates intact at 1.75%. Reserve Bank of New Zealand (RBNZ) governor Graeme Wheeler kept rates unchanged in May and suggested that rates might not go up in the near future.


The governor reiterated the action in its most recent monetary policy setting meeting in June. The New Zealand dollar held onto gains against the greenback owing to this action. This was despite the fact that inflation reached the mid-point of its target range of 1–3%.


The governor stated that a weaker New Zealand dollar is expected to rebalance growth and that the surge in the currency is temporary, which has been caused by higher export prices. However, Zoe Wallis, chief economist at Kiwibank in Wellington, in a discussion with Bloomberg, cited the currency’s recent surge to the lack of direction on exchange rate policies in the RBNZ meeting. Moreover, a faster-than-expected inflation growth might push the RBNZ to implement interest rate hikes sooner than the third quarter of 2019.


The governor also said that the growth outlook remains positive and expects inflation to remain at around 2%. Consumer prices rose 2.2% in the first quarter of 2017, up from 1.3% in the previous period. The economy advanced 0.5% in the first quarter of 2017, up from 0.4% in the earlier quarter. Moreover, the nation’s business confidence measured by the ANZ Business Confidence Index increased to 14.9 in May 2017 from 11 in the previous month.


Let us now discuss the most popular New Zealand ETF, ENZL (see all Asia-Pacific (Developed) ETFs here).


iShares MSCI New Zealand Capped ETF ENZL


This ETF provides exposure to equities of companies based out of New Zealand. The fund has AUM of $162.15 million and charges 48 basis points as fees per year. From a sector look, Utilities, Health Care and Industrials take the top three spots, with 17.90%, 16.22% and 14.41% allocation, respectively (as of June 20, 2017). From an individual holding perspective, Spark New Zealand Ltd, Auckland International Airport Ltd and Fisher & Paykel Healthcare Corp are among the top holdings of the ETF, with 9.89%, 9.49% and 9.07% allocation, respectively (as of June 20, 2017). The fund has returned 7.60% in the last one year and 13.67% year to date (as of June 21, 2017). ENZL currently carries a Zacks ETF Rank #3 (Hold) with a Low risk outlook.


We will now compare the performance of ENZL to a broad Asia Pacific ETF, DVYA.


iShares Asia/Pacific Dividend ETF DVYA


This ETF aims to provide exposure to companies in Australia, Hong Kong, New Zealand, and Singapore. The fund has AUM of $44.83 million and charges 49 basis points as fees per year. It has 48.27% exposure to Australia, 27.47% to Hong Kong, 14.21% to New Zealand and 9.43% to Singapore (as of June 20, 2017). From a sector look, Financials, Consumer Discretionary and Telecommunications take the top three spots, with 22.10%, 19.87% and 19.29% allocation, respectively (as of June 20, 2017). From an individual holding perspective, Sky Network Television Ltd, Spark New Zealand Ltd and Starhub Ltd are among the top holdings of the ETF, with 5.64%, 4.98% and 4.27% allocation, respectively (as of June 20, 2017). The fund has lost 1.25% in the last one year but has gained 5.38% year to date (as of June 21, 2017). DVYA currently carries a Zacks ETF Rank #3 with a Medium risk outlook (read: Moody's Downgrades Australian Banks: ETFs in Focus).


Below is a chart, comparing the year-to-date performance of the two funds.


 
Source: Yahoo Finance


Bottom Line


The New Zealand ETF significantly outperformed its broader Asia Pacific counterpart. Though the economy has been doing well, there is increased uncertainty about the path inflation and interest rates will take. As a result, we believe it is best to remain on the sidelines for now.


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ISHARS-MSCI NZ (ENZL): ETF Research Reports
 
ISHARS-A/P DV30 (DVYA): ETF Research Reports
 
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