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Another Rate Cut Could Boost New Zealand ETF

August 11, 2016 1:23 pm
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Quiet as it has been kept, the iShares MSCI New Zealand Capped ETF (NYSE: ENZL) is up more than 25 percent year-to-date, making it one of the best-performing developed markets single-country exchange traded funds.

ENZL has also recently been making a series of all-time highs, a trend that may continue following another interest rate reduction courtesy of the Reserve Bank of New Zealand (RBNZ). During Thursday's Asian session, RBNZ said it cut New Zealand's benchmark lending rate by 25 basis points to an all-time low of 2 percent.

While many U.S. investors don't pay a lot of attention to the goings on in New Zealand or the country's monetary policy, the fact that RBNZ has cut rate multiple times this year is significant because it's telling about the current state of affairs for global central banks.

In 2014, RBNZ actually tried bucking the trend set by its counterparts in other developed nations by, gasp, modestly raising rates. As recently as 2008, New Zealand's interest rates were as high as eight percent.

Alas, RBNZ is likely cutting rates, at least in part, to weaken the New Zealand dollar. At the start of this year, 64 U.S. cents bought one New Zealand dollar. At this writing, it takes about 72.6 cents to buy one kiwi, and that kiwi strength has come without the benefit of interest rate hikes.

Kiwi strength is significant regarding ENZL because the ETF is not currency hedged, meaning investors in the fund should root for a stronger New Zealand currency. Although New Zealand is viewed as an export-driven economy, many of the ENZL's 29 holdings are not major exporters to the U.S., so a stronger kiwi works in investors' favor with this ETF.

Interestingly, and it should be noted this space is usually not one to indulge conspiracy theories, data suggest some traders were betting on the rate cut because ENZL has added $11.4 million in new assets this month. That does not sound like much, but it is a decent percentage of ETF's $146.3 million in assets under management.

Year-to-date, investors have allocated $51.7 million to ENZL.

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