Some Good News For Australia ETFs

Thanks in part to rebounding commodities prices and the Reserve Bank of Australia's (RBA) efforts to weaken the Australian dollar, exchange-traded funds tracking equities down under are among this year's best developed markets performers.

The Land Down Under

While the MSCI EAFE Index, of which Australia is a major component, is slightly lower on a year-to-date basis, the iShares MSCI Australia Index Fund (ETF) EWA is up 3.3 percent. The WisdomTree Australia Dividend Fund (WisdomTree Pacific ex Japan Hgh Yd (ETF) AUSE) is even better. A lot better. The WisdomTree Australia offering is higher by 7 percent.

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On their own merits, the performances being turned in by those Australia ETFs are impressive. When considering AUSE and EWA are rising against the backdrop of mounting concerns about a hard landing in China, Australia's largest trading partner, the ETFs look all the more impressive.

Australian Banks

There is more good news. Australia's biggest banks, many of which are major holdings in the aforementioned ETFs, appear well-positioned to endure macroeconomic concerns, including issues stemming from China's slowing economy.

“Fitch says strong company profiles are driving the Viability Ratings of the major banks, being Australia and New Zealand Banking Group Limited, Commonwealth Bank of Australia, National Australia Bank Limited and Westpac Banking Corporation. The profiles reflect stable, simple and transparent business models and a leading market-share in a number of products across Australia and New Zealand. This provides the banks with the pricing power to ensure strong and consistent profitability while maintaining a fairly conservative risk appetite relative to international peers,” according to the ratings agency.

The ETFs

The health of Australia's big banks cannot be understated as a catalyst for ETFs such as AUSE and EWA. EWA, the iShares offering, allocates nearly 51.8 percent of its weight to financial services stocks, almost quadruple the ETF's second-largest sector weight. Each of EWA's top four holdings are bank stocks.

AUSE's financial services exposure is significantly below that of the rival of EWA, but at 22.6 percent, financials are still AUSE's biggest sector weight.

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Bank stocks are also significant contributors to Australia's status as one of the better ex-U.S. dividend destinations. For example, AUSE's underlying index yields nearly 4.1 percent, more than double Australia's benchmark interest rate. Over the past few years, Australia has been one of the best developed markets dividend growers after the United States and the UK.

“Pockets of Australia's property market may encounter potential oversupply of new residential housing and hurt house-prices in those areas. However, a stable labour market and historically low interest rates should limit the impact on the banks' asset-quality. Fitch expects the banks to maintain tightened underwriting criteria implemented from mid-2015 to address regulatory pressure and a more challenging operating environment. This should limit asset-quality deterioration for recently originated loans,” added Fitch.