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It Might be Time to Say GDAY to Higher Aussie Rates


Australia is the world’s 12th-largest economy and a previous spate of interest rate cuts down under appears to be having the desired impact of jolting economic growth, meaning the Reserve Bank of Australia could reverse course to tightening measures.

Australia is projected to be the third-fastest growing developed market this year, which could put a wrench in RBA’s plans to keep rates low, reports Candice Zachariahs for Bloomberg.

Since 2011, RBA has cut rates by 225 basis points to 2.5%, which has helped lift Australian stocks and dividends. Australian companies paid $40.3 billion in dividends last year, nearly double the amount paid in 2013. Although a benchmark lending rate of 2.5% is high by the standards of developed markets, it is low relative to Australia’s interest rate history. [Pricey, but Australia ETFs Keep Soaring]

Some exchange traded funds appear to be signaling that RBA will be forced to tighten if economic growth exceeds expectations. The CurrencyShares Australian Dollar Trust (FXA) is up 3.3% over the past 90 days while the ProShares Ultra Australian Dollar (GDAY) , a double-leveraged ETF, has surged 9.3% over that time.

Although the Aussie has strengthened, that has not derailed ETFs tracking Australian equities from posting impressive gains. The iShares MSCI Australia ETF (EWA) and the WisdomTree Australia Dividend Fund (AUSE) are up an average of 8.2% this year compare to a 7% gain for the iShares MSCI EAFE ETF (EFA) .

AUSE has a distribution yield of 6.1% while EWA has a trailing 12-month yield of 4.3%, indicating the two ETFs embody Australia’s reputation as one of the better ex-U.S. developed market dividend destinations. [Embracing Australian Dividends]

Even if RBA does raise rates, which is far from a foregone conclusion, that does not mean AUSE and EWA will languish. It is nearly a certainty that the Bank of England will soon raise rates, but the iShares MSCI United Kingdom ETF (EWU) is higher by 6.7% this year. The Reserve Bank of New Zealand has raised rates twice this year, an almost unfathomable move by a developed market, but the iShares MSCI New Zealand Capped ETF (ENZL) has surged 15%.

There is a new entrant to the Australia ETF fray. The SPDR MSCI Australia Quality Mix ETF (QAUS) , which debuted earlier this month as part of a suite of six quality single-country funds from State Street, tracks the MSCI Australia Quality Mix A-Series Index and charges 0.3% per year.

QAUS holds 69 stocks with a combined 55% of its weight going to the financial services and matierals sectors. [Quality Approach to Single-Country ETFs]

iShares MSCI Australia ETF


Tom Lydon’s clients own shares of EFA.