NEW YORK ( TheStreet) -- Australia has long been a centerpiece in how I build foreign exposure into client accounts.Australia's economy depends on commodities while the U.S. relies on the service industry. The different economic attributes has meant that Australia is usually on a different economic cycle, which has helped the country outperform the U.S. Australian stocks gained 51% during the last decade while the S&P 500 Index fell 24%. It's worth noting that Australia hasn't had a technical recession since 1991, though it came close in 2008. For years, the most popular exchange traded fund for Australian access has been the iShares MSCI Australia Index Fund ( EWA). Because of the appreciation of the Australian dollar compared to the U.S. dollar, the iShares fund has doubled during the past decade. The recently launched IndexIQ Australia Small Cap ETF ( KROO) offers another way to access Australian stocks. The new small-cap fund complements the large-cap exposure offered by the iShares fund. The iShares fund's largest holding is BHP Billiton ( BHP) with 14% of its assets. Four banks -- Commonwealth Bank of Australia, Westpac Bank, Australia and New Zealand Banking Group and National Australia Bank -- make up 27% of the fund. Although most people think of the materials sector first when they think of Australia, the financial sector comprises 44% of the fund and materials 26%. The IndexIQ Australia Small Cap ETF looks much different, with only 10% in financials. The materials sector is the largest position at 28%, followed by consumer discretionary at 24% and industrials at 10%. Unless you're a regular viewer of CNBC's Squawk Australia most of the individual holdings will be unfamiliar, but some are quite interesting companies, including surfwear maker Billabong International, electronics retailer JB Hi-Fi and Ansell, the world's largest makers of rubber gloves. As is typical of small-cap exposure, the historical returns of the index underlying the Australia Small Cap ETF have been more volatile than the large-cap MSCI Australia Index. During the past five years, the small-cap index returned 9.3% annually, on average, with a standard deviation of 32.6, while the MSCI Index has gained 11%, with a standard deviation of 25.58. During the down year of 2008 small caps went down 8 percentage points more than the large caps. In the bull market years between 2005 and 2007, Australian small-cap stocks outperformed large-caps by 5 percentage points, on average.
For years, I have been writing about how U.S. investors should allocate more of their portfolios to foreign equities. Many of the existing country funds tend to have large holdings of financial stocks, so heavy use of these funds could result in having too much invested in what might be the least healthy sector of the market. The new fund from IndexIQ, the company that launched the IndexIQ Canada Small Cap ETF ( CNDA), offers foreign exposure that targets stronger industries. -- Written by Roger Nusbaum.