Are you an investor who seeks a broad portfolio designed to benefit from a world economic recovery? Would you like to benefit from demand for commodities such as oil, gas, lumber, raw materials, and basic metals? If at the same time you are too risk averse to trade commodities (or commodity ETFs, which often use futures anyway and are subject to contango slippage and tracking error), there is still an easy way to obtain the performance you seek.
The iShares MSCI Canada Index Fund (EWC) and its Southern Hemisphere cousin, the iShares MSCI Australia Index Fund (EWA), offer investors a compelling palette of opportunities. First, both ETFs have lengthy trading records and staying power, which cannot be said for narrow commodity ETFs. Second, the ETFs trade millions of shares per day, providing the liquidity both traders and long-term investors need. Third, both ETFs represent nations that score high on economic and political freedom measures:
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And last, neither country is tied heavily to Europe, with its eternal political and economic crises. Instead, Canada is tied to the U.S. -- the vast majority of its population lies very close to the U.S. border, and everyone from hockey players to lumberjacks count on U.S. demand for its expertise. Australia, for its part, has been strengthening its ties to the Asian tigers for well over a decade.
In addition, the recent U.S. "pivot" toward Asia on military matters -- with a special emphasis on bases, the Navy, and protection of shipping lanes in the region -- is a long-term benefit for Australian/Asian trade. General MacArthur, of WWII and Korean War fame, must be smiling since he suggested this shift away from Europe more than seven decades ago. Yet even now, U.S. policy in the area has been dominated by colorful stereotypes and media caricatures.
Needless to say, there is plenty of room for improvement in the attitude of citizens and investors toward Asia. That improvement can be profitable to you.
A combined investment in EWA and EWC offers the investor a low risk way to play both the "Asian card" and the "world economic recovery card." The ETFs are eerily similar: Both feature banks, energy, and basic materials among their sector weightings. According to Yahoo Finance, Australia is tad heavier on financial services; Canada is the purer commodity/basic materials play.
With the exception of the 2008 crash, over the past decade EWC has found consistent support at just below $25 a share. Over the past 12 months, the shares have built an ascending triangle, finding support at successively higher levels but stubbornly refusing to break higher than $29.50 per share. On the other hand, a glance at on-balance volume shows that smart money has not really been moving into the shares: Volume has been heavier on the down days than up days for most of this period.
Investors considering EWC should wait until the price breaks out of this formation to the upside, on strong volume, before committing funds to these shares.
The situation with Australia is more promising. In the post-crash era it has shown consistent support in the high teens and now the low twenties, building an ascending triangle much akin to its Canadian cousin. However, EWA has broken upside in recent weeks, admittedly at somewhat lower volume than a technician would prefer to see:
Still, recent improving economic data from China and the U.S. suggest this breakout may be a meaningful buy signal for long-term investors: China's recent Purchasing Managers Index showed signs of strength. America's improving real estate market, GDP upward revisions, and fiscal cliff negotiations give a basis for optimism here. (Europe remains a sick puppy, but that was the basis for selecting these ETFs to begin with.)
Long-term investors should consider the following: Buy shares in EWA based on its Asian emphasis, improving economic data from the region, and its recent breakout. The width of the triangle at its formation suggests an immediate price objective of $30 a share. If the world economic picks up speed smartly in the next few years, these price objectives will prove to be very conservative.
Traders should consider what happens if events do not turn out as expected. In this case, if the Australian ETF falls below $23.50 a share (the lows earlier this autumn), then the breakout has failed and the position should be terminated. Thus the risk/reward ratio (risking about a $1.50 to obtain $5, or even more) is very attractive.
Long-term investors can be more patient and expect support at the lower trendline. While you are waiting, the EWA pays a 4.5% dividend. No wonder Australians of all species are smiling:
In the meantime, closely monitor the EWC shares. If they rally on strong volume toward the top of their triangle near $30 a share, those shares may be purchased as well -- even in advance of a breakout. Similar chart analysis suggests a price objective of $35 a share.
Note: No Koalas were injured in the writing of this article.