Two Plays Down Under

Every so often I get an email from a reader asking why I profile some exchange-traded funds that have very little volume.

The idea is straightforward: Some of these funds will absolutely be the best way for investors to access certain parts of the market.

So it might be with the WisdomTree Pacific Ex-Japan High-Yielding Equity fund (DNH) as a proxy for investing in Australia.

I first wrote about Australia as an investment destination last September, and the simple argument remains the same: As a commodity-based economy, Australia stands to be at different points in the economic and stock market cycles than the U.S. -- it zigs when the U.S. equity market zags.

Since that article was published last year, the low-correlation idea appears to have held up. In fact, according to PortfolioScience.com, the correlation between the iShares MSCI Australia Index (EWA) ETF, or EWA, and the S&P 500 SPDR (SPY) for the last year has been 0.509 (a perfect correlation of 1 implies that two securities move in lockstep).

This leads us to the WisdomTree Pacific fund, or DNH, and whether it could be a better vehicle than EWA to capture Australia.

DNH is a newer investment option, having been launched earlier this summer.

Despite the "Pacific" name implying it is a regional fund, it is 87.09% invested in Australia, 7.53% in New Zealand, 4.85% in Singapore, and 0.53% in Hong Kong. I would not expect the fund to be a proxy for Singapore or Hong Kong given the very limited exposure.

DNH is expected to yield a whopping 6.65%; high yields are relatively available down under.

But one of the big reasons to own Australia is its materials exposure, and though DNH has strong dividends, it lacks in materials holdings.

Zig Zag EWA keeps up performance as SPY drags

Source: Big Charts

The materials sector comprises 22.8% of EWA, with BHP Billiton (BHP) as the largest holding, with a 12.3% weighting. DNH, on the other hand, only devotes 3.94% to materials. Moreover, BHP, for now, is not a component of DNH.

Most of the materials exposure not in DNH went to the telecom sector. Telecom only comprises 1.03% of EWA, with its position in Telstra (TLS). DNH allocates 16% to telecom, with a 6.8% holding in Telstra and a 3.09% holding of Telecom New Zealand (NZT). Both companies face restructurings that create uncertainty for future dividends, meaning that DNH could be hurt if any news about the telecom dividends is worse than the market expects.

Material World BHP has helped buoy EWA

Source: StockCharts.com

The chart shows BHP outperforming EWA, albeit with some substantial dips along the way. If BHP starts to turn up again, EWA likely will do better and could pull away from DNH in terms of performance.

Investors who believe that the commodity run is over may not be concerned about the lack of materials exposure in DNH. But that is not a bet I would make.