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Moody's Downgrades Australian Banks: ETFs in Focus

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Global credit rating agency Moody’s has downgraded multiple Australian Banks, including the big four, owing to increased risks in the country’s real estate debt market.


Moody’s downgraded the long-term rating of the big four Australian banks, the Australia and New Zealand Banking Group, Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Corporation, to Aa3 from their previously held Aa2 rating. It also downgraded ratings of eight other small banks.


While the agency does not expect a sharp fall in housing prices in the near future, it cited multiple risks in the current environment, including rise in household debt and slowing wage growth. Moreover, increased interest-only and investment loans have made the agency uncomfortable about the risks prevailing in the economy. In the June meeting of the Reserve Bank of Australia (RBA), it held the key cash rate steady at 1.5% for the 10th consecutive month.


Australian banks have been under increased scrutiny for lending a higher proportion of a borrower’s income compared with their foreign peers. They recently tightened their lending policies owing to increased regulatory pressures.


Another issue hanging over the big four banks of Australia and Macquarie group is the proposed introduction of a $6.2 billion bank levy. The bill got passed by the Labor and Greens and the extra cost is expected to be passed on to the consumers, per Treasury officials.


Australia’s GDP grew 0.3% in the first quarter of 2017 compared with 1.1% in fourth-quarter 2016. The household debt for the fourth quarter of 2016 came in at 123.1% of GDP, unchanged from the previous quarter. However, Australia’s unemployment rate slowed to 5.5% in May 2017 from 5.7% in April (read: Australia Unemployment at 4 Year Low: ETFs in Focus).


Let us now discuss a few ETFs focused on providing exposure to the Australian economy (see all Asia-Pacific (Developed) ETFs here).


IShares MSCI Australia Index Fund (EWA - Free Report) :


This fund is the most popular Australia ETF in the space, offering exposure to the most liquid equities in the Australian economy. It tracks the MSCI Australia Index.


This fund has AUM of $1.78 billion and charges a relatively moderate fee of 48 basis points a year. From a sector look, Financials, Materials and Real Estate are the top three allocations of the fund, with 41.88%, 15.44% and 9% exposure, respectively (as of June 16, 2017). Commonwealth Bank Of Australia, Westpac Banking Corporation Corp, Australia and New Zealand Banking group and National Australia Bank Ltd collectively have over 31.5% allocation (as of June 16, 2017). The fund has returned 9.94% year to date and 17.38% in the last one year (as of June 19, 2017). EWA currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.


WisdomTree Australia Dividend Fund (AUSE - Free Report) :


This ETF is another popular fund offering exposure to the Australian economy and tracks the WisdomTree Australia Dividend Index.


This fund has AUM of $36.36 million and charges a fee of 58 basis points a year. From a sector look, Financials, Consumer Discretionary and Materials are the top three allocations of the fund, with 24.36%, 17.20% and 12.98% exposure, respectively (as of June 19, 2017). Commonwealth Bank Of Australia, Westpac Banking Corporation Corp, Australia and New Zealand Banking group and National Australia Bank Ltd collectively have over 11% allocation (as of June 16, 2017). The fund has returned 10.26% year to date and 19.03% in the last one year (as of June 19, 2017). AUSE currently has a Zacks ETF Rank #3 with a Medium risk outlook.


SPDR MSCI Australia Quality Mix ETF :


This fund tracks the MSCI Australia Quality Mix A-Series Index, which is an index of Australian securities targeting performance of sub-indexes based on one of the three factors: quality, low-volatility, and value. Each sub-index receives equal weight.


This fund has AUM of $15.57 million and charges a fee of 30 basis points a year. From a sector look, Financials, Real Estate and Materials are the top three allocations of the fund, with 31.24%, 15.92% and 12.04% exposure, respectively (as of June 16, 2017). Commonwealth Bank Of Australia, Westpac Banking Corporation Corp, Australia and New Zealand Banking group and National Australia Bank Ltd collectively have over 20% allocation (as of June 16, 2017). The fund has returned 10.77% year to date and 15.43% in the last one year (as of June 19, 2017). QAUS currently has a Zacks ETF Rank #3 with a Medium risk outlook.


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