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A Challenge For Australia ETFs

The iShares MSCI Australia Index Fund (ETF) (NYSE: EWA), the largest U.S.-listed exchange-traded fund tracking Australian equities, gained 11.1 percent last year. That was good for one of the better performances among ex-U.S. developed market single-country ETFs, but some challenges linger for EWA equity markets in the world's 12th-largest economy.

Australian Banks

At least one major ratings agency is souring on Australian banks. In a recent note, Fitch Ratings, revised its “sector outlook on Australia's banking sector to negative from stable in 2017.”

That is noteworthy for investors considering an Australia ETF like EWA because many of these ETFs are heavily allocated to financial services stocks. For example, EWA devotes 43.5 percent of its weight to financial services stocks, more than two and a half time the ETF's second-largest sector exposure, which is materials.

Previously, Australian banks appeared well-positioned to endure macroeconomic concerns, including issues stemming from China's slowing economy. Additionally, Fitch had some encouraging things to say about the country's banks last year.

Viability Ratings, Business Models And Market Share

Fitch said strong company profiles are driving the viability ratings of the major banks, being Australia and New Zealand Banking Group Limited, Commonwealth Bank of Australia, National Australia Bank Limited and Westpac Banking Corporation. The profiles reflect stable, simple and transparent business models and a leading market-share in a number of products across Australia and New Zealand. This provides the banks with the pricing power to ensure strong and consistent profitability while maintaining a fairly conservative risk appetite relative to international peers,” according to the ratings agency in a note out in the second quarter of 2016.

hat outlook is changing at a time when Australian interest rates reside at historic lows.

“Fitch's rating outlook for Australian banks remains stable. However, the ongoing rise in household debt and house-price growth heightens the banking system's sensitivities to a sharp correction if labour market conditions and interest rates were to change. In addition, a worse-than-expected slowdown in China's growth would negatively impact Australia's economy given the countries' strong economic ties,” said Fitch in its most recent assessment of Australia's banks.

Australian banks are primary drivers of the country's usually steady growth and important contributors the four percent trailing 12-month dividend yield found on EWA, which is well ahead of the comparable dividend yield on the S&P 500.

Investors added an impressive $323.5 million to EWA last year.

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