TheStreet.com Ratings: An ETF Idea for Australia

The Australian senate's decision earlier this month to remove restrictive media ownership laws that have been in place in the country for decades will allow companies to control two forms of media outlets -- a radio station and a newspaper, for instance -- in one city.

In addition, the new regulations, which must be approved by the country's house of representatives -- a move that most observers say is a given -- would open the door to foreigners seeking to buy Australian media companies.

Australia has lagged other countries in both freeing up its media sector and attracting private equity, so both of these factors coming into play simultaneously is good news for savvy investors. Over the past year, private equity investment in the country has exploded, with offers for Australian business assets reaching $21.3 billion so far this year, up from $1.4 billion in all of last year, according to Bloomberg.

Indeed, talk of mergers and takeovers is heating up Down Under.

TheStreet.com Ratings is highlighting the iShares MSCI Australia Index Fund(EWA Quote) as an ideal product for those wanting exposure to the thriving Australian economy.

Of the 800 closed-end funds that we rate, including some 198 ETFs, the iShares Australian fund is currently ranked No. 22. In addition, it has earned our A-plus rating.

The fund's portfolio includes the country's major media companies, so any buyout/takeover activity (the main names on the radar screen are John Fairfax Holdings -- a likely target for acquisition -- and Publishing and Broadcasting) resulting from the eased ownership regulations will likely benefit the stocks of these companies and, hence, this fund.

The table below lists the fund's top six sectors by allocation, as of Sept. 30.

Money, Metals and Buildings
Sector	Percent
Banks	27.82%
Mining	16.82
Real Estate	11.25
Insurance	6.39
Oil & Gas	4.05
Diversified Financial Services	3.93
iShares.com

Banks in the Lead

Financial institutions are repeatedly showing up as major assets in our top-rated funds across the globe, and this product is heavily weighted toward the banking sector; this is another reason TheStreet.com Ratings likes it.

The bank holdings represent stable and conservatively run organizations that withstood the ultimate test during the Asian crisis of 1997. While many financial institutions in the region collapsed under the weight of nonperforming loans, the Australian banks continued business relatively unscathed despite their geographic proximity and exposure to the region.

The fund's stake in the mining sector is another strength, as Australia is a resource-based economy -- that is, it is rich in minerals and commodities, items that rapidly expanding Asian economies, especially China, will demand for years to come.

The portfolio's real estate exposure, however, is cause for some concern, as that sector is in the midst of a correction globally. However, though returns from property are down from their highs, they are still very good overall in Australia.

The table below lists the fund's top 10 holdings as of Sept. 30.

A Concentrated Strategy
Name	Ticker	% Net Assets	Sector
BHP Billiton	BHP	10.88%	Materials
National Australia Bank	NAB	7.16	Financials
Commonwealth Bank of Australia	CBA	7.16	Financials
Australia & New Zealand Banking Group	ANZ	5.97	Financials
Westpac Banking	WBC	5.06	Financials
Westfield Group	WDC	3.43	Financials
Woolworths	WOW	2.91	Consumer Staples
Rio Tinto	RIO	2.43	Materials
QBE Insurance Group	QBE	2.39	Financials
Woodside Petroleum	WPL	2.23	Energy
Source: Bloomberg

This iShares ETF -- which recently had 90 names in its portfolio -- allocates 49.62% of its total assets to the top 10 holdings. This represents a concentrated strategy, which does come with higher levels of risk should the heavy weighting toward those companies prove unjustified. However, with the increased risk comes the potential for above-average returns, and this fund is surely no slouch in that department.

In general, the names in the fund represent the largest and most liquid and well-known companies in the Australian market, most of which have a very long track record of success -- they are well-established and mature businesses.

Let's look at the fund's performance figures as of Oct. 17, which are shown below alongside the index whose returns it seeks to match: the MSCI Australia Index.

Strong Returns
Time Period	Performance
	EWA	MXAU
1 Week	1.5%	1.18%
1 Month	4.16	5.28
3 Month	8.12	8.85
YTD	16.4	16.14
1 Year	24.13	27
3 year	24.89	24.35
5 Year	23.14	16.46
Source: Bloomberg

These are very good numbers, especially when you consider that the three-month return -- 8.12% -- as of Oct. 17 is half of the YTD figure of 16.4%. This suggests that the fund's returns are increasing. In sum, EWA has both good long-term and near-term performance figures.

Australia's economic figures, as of Oct. 17, are shown below:

• GDP growth: 1.9%
• Consumer prices: up 4%
• Federal budget surplus: 2.3% of GDP
• Current account deficit as percentage of GDP: negative 6%
• Unemployment rate: 4.8%
• Approximate GDP: $670 billion

The GDP growth rate for Australia is low compared with those of its Asian neighbors, which average around 5% and are led with rates of 11.3% and 9% from China and India respectively.

However, a lower growth rate is to be expected from Australia, a well-administered country with a mature economy. Consumer prices are increasing at a high rate of 4%, and this, along with the large current-account deficit (as a percentage of GDP), suggests that the reserve bank of Australia may have to raise rates to bring inflation back to acceptable levels.

Despite some concerns about the economy, our data and models show that the iShares Australia fund is delivering very competitive returns when compared with other international funds -- and, for that matter, U.S.-focused products.