Evaluating Australian ETFs During the Country's 'Soft Patch'

This article is now exclusive for PRO subscribers.

Can you name the developed country that hasn’t experienced a recession in close to 20 years? It’s Australia. And not only did the land “down under” weather the dot-com disaster that ushered in the 21st century, the nation also made it through the global credit collapse of 2008.

Equally worthy of note, Australia was the first developed world sovereignty to raise interest rates in the fight against inflation. The 4.75% overnight lending rate is the highest in the industrialized world.

On the other hand, Australia is currently enduring its own version of a “soft patch.” Australian GDP contracted -1.2% in Q1. Some of the reasons include weak demand for natural resources by China and weather-related woes for the mining sector. In addition, full-time employment declined for the second month in a row.

The recent data inspired the Reserve Bank of Australia (RBA) to leave interest rates alone for the fourth straight month. It follows that the Currency Shares Australian Dollar (NYSEARCA:FXA) may be about as strong as it's going to get in the near-term.

Click to enlarge

FXA 50

Over the long-term, it’s easy to make a case for the Aussie buck over the greenback. Not only is their plenty of room for the RBA to ease should it need to do so, but Chinese and Indian demand for resources won’t be down for much longer.

For the time being, though, I will stay away from CurrencyShares Australian Dollar (FXA). The possibility of an unwinding of the currency trade during a dollar reversal (i.e., safe-haven seeking in the the yen and the dollar) makes CurrencyShares Australian Dollar less attractive here in June.

What about placing Small Cap Australia (NYSEARCA:KROO) on a watch list? KROO tracks a market-weighted index of small-cap Australian companies. The fund is heavy on materials (28%) and consumer discretionary (25%) stocks so that you may better tap into domestic consumption ... at least in theory.

Unfortunately, Small Cap Australia (KROO) has yet to deviate far from the pattern of the MSCI Emerging Market Index. Since KROO’s introduction, there has been very little difference between KROO and the far more liquid Vanguard Emerging Market Fund (NYSEARCA:VWO). In fact, VWO may provide a smoother ride in an effort to capture world demand for materials.

Click to enlarge


So what should an investor do if he/she believes that the Australian economy is destined to rebound? After all, the large-cap tracker, iShares MSCI Australia (NYSEARCA:EWA), also tends to follow the exact pattern of VWO.

In truth, ETF investors may need to expand their horizons. If you already have broad-based emerging market exposure, you could take your shot at lesser-known individual Aussie companies like Westpac Banking (NYSE:WBK). The heat in the lending and financial services kitchen would be difficult to manage for most, but the 7% annual yield isn’t too shabby.

Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.