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
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
ETF, or EWA, and the
S&P 500 SPDR
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.
Source: Big Charts
The materials sector comprises 22.8% of EWA, with
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
. DNH allocates 16% to telecom, with a 6.8% holding in Telstra and a 3.09% holding of
Telecom New Zealand
. 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.
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.
The dividend, of course, is some compensation for DNH's materials deficiency. DNH has that 6.65% yield, while EWA only yields 3.19%.
Thus, each Australia ETF has its advantages and disadvantages. But there could be some middle ground for investors who like the yield of DNH, but want more materials exposure. A combination of DNH along with a mining stock like BHP or
could effectively recreate EWA with much more yield.
As an example, an investor with a diversified portfolio wishing to allocate $20,000 to Australia could put $16,000 in DNH and $4,000 into one of the miners. This blend gives the portfolio a 23% weight to materials, very close to EWA's weight, and a yield of 5.48%.
The investor who can take some single-stock risk may be better off with the DNH and mining stock combination because the yield is so much higher. But for investors leery of owning a single Australian mining stock, the iShares product will capture most of the effect, albeit with a lower yield.
At the time of publication, Nusbaum was long EWA, although positions may change at any time.
Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, Ariz., and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback;
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