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Australia ETFs in Focus as Rate Hike Hopes Fade

Economic Data


Per the Australian Bureau of Statistics, the country’s headline consumer price index (CPI) increased 0.6% in the third quarter sequentially and 1.8% on a year-over-year basis. The number fell shy of economists’ expectations of 0.8% in the quarter and 2% in the year (read: What Lies Ahead for Australia ETFs?).


Core inflation, which excludes volatile items, increased 0.4% in the quarter compared with economists’ expectations of 0.5% increase. The Australian dollar sank after the data was released.


Despite steep electricity prices, inflation figure remained subdued. Per an ABC article, electricity prices and gas contributed 8.9% and 5.2% to inflation, respectively, while vegetable prices and fuel dragged down inflation by 10.9% and 2.3%, respectively.


Retail sales declined 0.6% in August compared with a decline of 0.2% in July, way below economists’ expectations of a 0.3% increase. The weakness in retail sales has somewhat dampened the government’s expectations of a 3% growth. Australia’s GDP grew 0.8% sequentially in the second quarter of 2017 and 1.8% from the prior-year period, marking the country’s 26th year without a technical recession. However, the IMF in its latest world economic outlook stated that it expects the Australian economy to expand a mere 2.2% this year compared with its April forecast of 3% (read: ETFs in Focus as IMF ups Global Growth Forecast).


Interest Rate


Australia’s housing market is booming and the Reserve Bank of Australia (RBA) kept rates unchanged at 1.5% in its October Monetary Policy Committee meeting for the 14th straight month. The RBA has signaled that it is in no rush to follow the path of other developed nations, which have adopted a rate-hike stance to reverse the financial crisis actions.


Owing to the weaker-than-expected inflation data, the outlook for an interest rate hike seems clouded. The markets believe that the RBA will hold the rates in most of 2018, if not the entire year, as the inflation figure is still far from its target band of 2-3%.


In a recent development, three of the major banks of Australia, Westpac Banking Corporation, Australia and New Zealand Banking Ltd and National Australia Bank Ltd have been accused of rigging the bank bill swap reference rate for profits. Moreover, there are talks of the banks approaching the Australian Securities and Investments Commission (ASIC) for settlement.


Let us now discuss a few ETFs focused on providing exposure to the Australian economy (see all Asia-Pacific (Developed) ETFs here).


IShares MSCI Australia Index Fund EWA:


This fund is the most popular Australia ETF in the space, offering exposure to the most liquid equities in the Australian economy. It tracks the MSCI Australia Index.


This fund has AUM of $1.8 billion and charges a relatively moderate fee of 48 basis points a year. From a sector look, Financials, Materials and Real Estate are the top three allocations of the fund, with 42.8%, 16.7% and 8.2% exposure, respectively (as of Oct 23, 2017). Commonwealth Bank Of Australia, Westpac Banking Corporation and Australia and New Zealand Banking Ltd are the top three holdings of the fund, with 10.5%, 8.6% and 6.9% allocation, respectively (as of Oct 23, 2017). The fund has returned 13.7% year to date and 11.0% in a year (as of Oct 24, 2017). EWA currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.


WisdomTree Australia Dividend Fund AUSE:


This ETF is another popular fund offering exposure to the Australian economy and tracks the WisdomTree Australia Dividend Index.


This fund has AUM of $367.3 million and charges a fee of 58 basis points a year. From a sector look, Financials, Consumer Discretionary and Basic Materials are the top three allocations of the fund, with 24.1%, 17.1% and 13.7% exposure, respectively (as of Oct 24, 2017). Harvey Norman Holdings Ltd, National Australia Bank Ltd and Westpac Banking Corporation are the top three holdings of the fund, with 4.0%, 3.2% and 3.1% allocation, respectively (as of Oct 24, 2017). The fund has returned 11.8% year to date and 10.5% in a year (as of Oct 24, 2017). AUSE currently has a Zacks ETF Rank #3 with a Medium risk outlook.


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