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Australia's Inflation Misses Target: ETFs in Focus

Consumer prices in Australia expanded 0.2% quarterly compared with estimates of 0.4% and 1.9% annually compared with the 2.2% estimate. Reserve Bank of Australia (RBA) targets inflation to be in the range of 2–3%.


Moreover, RBA’s preferred inflation measure — core inflation — grew 0.5% in the quarter and 1.8% in the last one year. However, this was still far from RBA’s target range. Weaker inflation figures led to a decline in the Australian dollar.


The lower-than-expected inflation is primarily being attributed to falling oil prices. This strengthens the possibility of interest rates remaining unchanged in the near future.


Labor market in Australia is resilient, as reflected by the jobs report of June 2017. Full-time jobs surged 62,000 in June compared with 53,400 in May, the biggest two-month increase since 1988. Part-time jobs on the other hand fell 48,000 in June for a net increase of 14,000 jobs (read: Australian Employment Advances: ETFs in Focus).


Although the employment data is expected to bode well for people expecting a rate hike by the RBA, Australia’s housing market is booming. Some economists predict that it has peaked and if the RBA goes on an aggressive rate hiking spree, the housing market could crash. Therefore, the path RBA will adopt in regard to interest rates is still quite uncertain.


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 $1.75 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 43.48%, 16.07% and 8.38% exposure, respectively (as of July 25, 2017). Commonwealth Bank Of Australia, Westpac Banking Corporation Corp and Australia and New Zealand Banking group are the top three holdings of the fund, with 11.45%, 8.54% and 6.95% allocation, respectively (as of July 25, 2017). The fund has returned 13.1% year to date and 11.01% in the last one year (as of July 26, 2017). EWA currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: China's Inflation, Debt & Impact on Australia: ETFs in Focus).


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 $37.62 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 24.52%, 17.27% and 13.49% exposure, respectively (as of July 26, 2017). Harvey Norman Holdings Ltd, Fortescue Metals Group Ltd and National Australia Bank Ltd are the top three holdings of the fund, with 4.28%, 3.26% and 3.07% allocation, respectively (as of July 26, 2017). The fund has returned 12.81% year to date and 13.38% in the last one year (as of July 26, 2017). AUSE currently has a Zacks ETF Rank #3 with a Medium risk outlook.


Let us now compare the performance of these ETFs with a broader Asia Pacific based ETF, IPAC.


iShares Core MSCI Pacific ETF IPAC


This fund focuses on providing exposure to equities of the Asia Pacific region.


This fund has AUM of $1.07 billion and charges a fee of 10 basis points a year. From a geographical perspective, Japan, Australia and Hong Kong round up the top three spots, with 66.51%, 19.41% and 9.3% exposure, respectively (as of July 25, 2017). From a sector look, Financials, Industrials and Consumer Discretionary are the top three allocations of the fund, with 19.66%, 17.54% and 15.53% exposure, respectively (as of July 25, 2017). Toyota Motor Corp, Commonwealth Bank of Australia and AIA Group Ltd are the top three holdings of the fund, with 2.39%, 1.89% and 1.52% allocation, respectively (as of July 25, 2017). The fund has returned 13.67% year to date and 14.45% in the last one year (as of July 26, 2017). AUSE currently has a Zacks ETF Rank #3 with a Medium risk outlook.


Below is a chart comparing the year to date performance of the three funds.


 
Source: Yahoo Finance


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ISHARS-AUSTRAL (EWA): ETF Research Reports
 
ISHRS-MSCI PAC (IPAC): ETF Research Reports
 
WISDMTR-AUS DVD (AUSE): ETF Research Reports
 
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