Commodities pricing are rebounding. So is the Australian dollar and that combination of factors, along with some others, has been enough to lift the iShares MSCI Australia ETF (NYSEArca: EWA) 6.5% year-to-date. That makes the largest Australia exchange trading in the U.S. one of this year’s better performers among developed market single-country ETFs.
Like so many developed market central banks, the Reserve Bank of Australia (RBA) has been actively reducing borrowing costs in recent years. Australia’s benchmark lending rate is currently 2%. That is a record low for the world’s 12th-largest economy, but high by the standards of the rest of the developed world.
Related: Aussie Dollar ETF Under Pressure
The looser monetary policy could support the economy but weigh on the AUD. Consequently, investors may track the markets through currency-hedged ETFs that try to mitigate the negative effects of a weakening Aussie, including the iShares Currency Hedged MSCI Australia ETF (NYSEArca: HAUD) and Deutsche X-trackers MSCI Australia Hedged Equity ETF (NYSEArca: DBAU).
[related_stories]The CurrencyShares Australian Dollar Trust (NYSEArca: FXA), which tracks the Aussie against the U.S. dollar, is up 3.1% this year. However, the Aussie dollar remains a currency to watch.
FXA could be increasingly vulnerable as the monetary policies of the Fed and the Reserve Bank of Australia continue diverging. RBA recently cut Australia’s benchmark interest rates to a record low.
Related: Dollar ETF Dithers
Looking ahead, most economists anticipate a second cut before the end of the year, with the June quarter inflation figure, which comes out in August, providing further guidance on the RBA’s path.
“The Australian construction PMI (Purchasing Managers’ Index) declined to 46.7 in May 2016 against 50.8 in April. However, the decline didn’t have any effect on Market indexes, which continued to gain last Wednesday. A rise in crude oil prices (USO) also strengthened commodity currencies such as the Australian dollar, the New Zealand dollar, and the Canadian dollar,” according to Market Realist.
There are other Australia ETFs to consider as well. The SPDR MSCI Australia Quality Mix ETF (NYSEArca: QAUS) emphasizes the quality factor, which captures excess returns to stocks that are characterized by low debt, stable earnings growth and other ‘quality’ metrics. Lastly, the First Trust Australia AlphaDEX Fund (NYSEArca: FAUS) selects Australian companies based on growth factors including 3-, 6- and 12-month price appreciation, sales to price and one year sales growth, along with value factors including book value to price, cash flow to price and return on assets.
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iShares MSCI Australia ETF
