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ETF News And Commentary

Thanks to global economic turmoil, commercial activities are slumping and economic growth rates are showing a broad slowdown in most developed as well as emerging economies. Still, the New Zealand economy has been able to hold up rather well, due to its relatively diversified and insulated economy that is far removed from many global issues.

However, as globalization has increased, economies around the world have become more interdependent and the economy of New Zealand is no exception to this. Although it has grown steadily over the past few years, it remains vulnerable to external shocks and slowdown in the global economy, especially in the case of emerging markets and Australian events (see Three Defensive ETFs for a Bear Market).

Despite this, New Zealand is still perceived as a safe haven by many thanks to its robust economic position and relatively low yields for its benchmark Treasury security. This has been a direct result of the risk off environment which caused massive sell offs from the equity markets and a decent rally in sovereign bond prices. This also caused upward pressure on the currency as well, hurting exports but buoying consumers’ abilities to purchase imports (read The Guide to International Treasury Bond ETF Investing).

The risk-off environment has also led to an increase in household savings and a check on private expenditure. Corporates are becoming more cautious about their decisions pertaining to sourcing and allocation of funds which keeps a check on their debt levels.

However, this has been largely offset by an increase in public debt. As of right now, the debt-to-GDP ratio for the economy stands at roughly 40% for the most recent fiscal year. This marks a huge increase over the past few years as the ratio was at just 17.4% at the end of 2007. 

The robust growth and moderate levels of inflation are key factors that have kept the OCR (Official Cash Rate) unchanged from its current level of 2.5%. The last time the Reserve Bank of New Zealand (RBNZ) loosened interest rates was way back in March 2011 from the then OCR of 3%. Going forward, the outlook for a further rate cut remains bleak thanks to moderate levels of inflation of 1% for the second quarter of 2012, down 0.6% from the first quarter levels.

New Zealand Economy

As a commodity centric economy, New Zealand had been aided by surging commodity prices during times of economic boom. However, with a generic slowdown in most parts of the globe, commodity prices have continuously fallen, thereby hurting the economy (read Top Commodity ETFs In This Uncertain Market). Despite this, the economy of New Zealand had been able to report a trade surplus of 331 million NZ$ for the month of June 2012, though it reported negative current account balance.

The nation also had to contend with Mother Nature’s fury as a series of natural calamities such as the earthquakes shook the city of Christchurch. The natural disaster had serious consequences on life and property and has especially impacted the infrastructure around the key city in the South Island (read Japan ETFs: One Year after the Fukushima Disaster). 

Nevertheless, New Zealand has always been an attractive destination for investors seeking international diversification. Low levels of unemployment, structured labor reforms, adequate banking capitalization levels and low levels of correlations with the disturbed U.S and European stock markets are some of the key positives that make investing in New Zealand appealing to some investors.

Also, its small size, favorable foreign investment policies, lower tax rates, strategic geographic location and abundance of natural resources are some of the factors that attract businesses, inviting them to set up regional locations in the extremely investor-friendly nation (read Developed Asia Pacific ETF Investing 101).

Given these factors, investing in the economy of New Zealand could prove to be an attractive proposition, especially during these volatile times. However, for investors seeking basket exposure to play the developed Asia-Pacific economy, there is one concentrated choice which we have highlighted in detail below:

The iShares MSCI New Zealand Investable Market ETF (ENZL) is the only product that provides a pure play in the New Zealand equities. Launched in September of 2010, ENZL tracks the MSCI New Zealand Investable Market Index.

The index is a market capitalization weighted index adjusted for free float. This has caused the ETF to be heavily skewed towards large cap stocks.

Since its inception, the ETF has been able to amass $105.51 million in assets under its management and has an average daily volume of 32,426 shares. It charges investors 0.51% per annum in fees and expenses. ENZL presently holds 24 securities in its basket, allocating 72.08% of its total assets in the top 10 holdings.

It has allocated enormously large proportions (18.11% of its total assets) in the Telecom Corporation of New Zealand (NZT), the largest telecommunications service provider in the country (see more in the Zacks ETF Center).

Telecom Corporation of New Zealand is closely followed by Fletcher Building Ltd. which accounts for 14.49% of ENZL’s total assets. Despite such large allocations to individual stocks, the ETF seems to have a diversified holding in terms of sectors.

It provides double digit exposure to six sectors which account for over 90% of its total assets. These sectors include Telecommunication Services (22.62%), Materials (16.45%), Industrials (14.84%), Consumer Discretionary (14.67%), Utilities (11.71%) and Financials (10.13%).

From a valuation perspective, the ETF is currently trading at price-to-earnings multiple of 27.01X its trailing twelve months earnings and 1.75x its book value. The surge in ENZL valuations is a direct result of the broader market recovery post-December 2011.

ENZL has a one year beta of 0.98 and an R-Squared value of 73.11% against the S&P 500 (see Four Easy Ways to Play Beta and Volatility with ETFs). This means that 73.11% of the variation in returns of ENZL can be explained by the variations in the S&P 500.

The fund has had a volatile last one year given the uncertainties surrounding the global economic conditions, and the natural disaster last year. However, ENZL stands out compared to many funds from a yield perspective, thanks to an attractive annual yield of 7.02%. Still, the fund has slumped about 4.8% in the past one year period although it has added about 7.7% so far in 2012. 

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