Investing in 'The Lucky Country' via ETFs

Unlike Europe (and the U.S.), the Australian government has very low overall debt levels and projects a budget surplus in 2012

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Since the Great Recession started to take shape in 2008, one mega-theme has dominated financial markets around the world: the avoidance of risk at any cost. This year, the unexpected mid-year slowdown in the U.S. economy and the spread of the sovereign debt crisis in Europe have served to make risk avoidance investment strategies even more attractive.

This so called “flight to safety” is understandable given the turbulence of financial markets in recent years, but even though steering clear of risk is a top priority for investors, it is a desire more easily expressed than satisfied.

Low-risk assets such as U.S. Treasury debt are in such high demand that yields on the benchmark 10-year Treasury note have been driven down below the rate of inflation. Ultra-safe short term Treasury bills now yield less than 10-basis-points annually.

The ideal solution would be assets based in an economy that is growing strongly, where the government has little debt, the currency is getting stronger, exports are large and growing, and yields pay something worth getting. It wouldn’t exactly hurt if this place also had thousands of miles of beachfront property and cute marsupials that sleep all day in trees.

Sound good? Welcome to Australia.

The Lucky Country, as Australia is often called, has many of the things investors currently want and few of the things they don’t.

Unlike Europe, the Australian government has very low overall debt levels and projects a budget surplus in 2012. Australia’s economy is one of the steadiest in the world, managing to avoid recession for the past 19 years.

Unlike the U.S., unemployment is low and exports are strong as growth in the Asia-Pacific region boosts demand for key products like coal and iron ore.

For U.S. investors, investing directly in Australia has historically been difficult. Exchange traded funds (ETFs) are starting to change that.

While such ETFs are exposed to changes in the Australian dollar, which could decline as the Reserve Bank of Australia moves to lower interest rates, any currency losses could be at least partially offset by gains in local currency asset prices.

At least five ETFs are focused on Australia exclusively, two of which own fixed-income assets. In November, PIMCO launched the Australia Bond Index Fund, which owns Australian federal, state, and corporate obligations. It has about $17 million in assets so far, an SEC yield of 3.85% on December 7, and pays dividends monthly.

It competes with the WisdomTree Australia & New Zealand Debt Fund, which is a restructured version of the WisdomTree Dreyfus New Zealand Dollar fund. This ETF owns mostly federal government debt from Australia and New Zealand as well as state obligations.

Listed in June, 2008, the ETF had about $26 million in assets and an SEC yield of 3.7% on December 7.

In addition to these ETFs, there are three Australian equity ETFs available to U.S. investors. The WisdomTree Australia Dividend fund might appeal to income-oriented investors with its 5.74% SEC yield as of September 30.

The ETF, which launched in June, 2006, has about $54 million in assets and owns blue chip Australian companies like Telstra, the country’s largest telecom service company, the four major banks – National Australia Bank, Commonwealth Bank, Westpac, and ANZ – and national retailers.

By far the largest Australia ETF is the iShares MSCI Australia Index Fund, which launched in March, 1996 and has about $2.9 billion in assets. The ETF has more than 14% of its assets in BHP Billiton, a global mining and energy company with significant operations in Australia.

About half of the ETF’s assets are in financials, including the four major banks. Its SEC yield on November 30 was 4.48%.

For those less interested in yield, the IQ Australia Small Cap ETF owns companies with a market capitalization in the lowest 15% of Australian publicly traded companies, subject to a minimum of A$150 million. Launched in March, 2010, it has about $18 million in assets.

The ETF owns mostly companies in the materials and consumer discretionary sectors. Its top three holdings as of September 30 were UGL, which provides construction and facilities management services; Ansell, which makes surgical gloves; and employment recruiter SEEK.

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S&P Capital IQ Senior Editorial Manager Vaughan Scully can be reached at Vaughan_scully@standardandpoors.com. Send him your ideas for mutual fund and ETF stories.

 

 

 

 

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