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Australia ETFs to Play the Coming Shale Boom

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Australia has always been a commodity powerhouse. The nation is largely responsible for fueling many emerging markets’ growth stories with its enormous stockpiles of base metals, coal, and agricultural products.

Yet despite the sparsely populated country’s widespread dominance of many commodity markets, it has been sorely lacking in one area, oil. The country is the sixth biggest in the world but has oil production that is barely in the top 30, needing over half a million barrels of oil a day in imports.

This could be changing in the near future though, as a recent massive shale oil discovery could dramatically alter this picture and indeed the regional oil landscape. According to recent surveys of the Arckaringa Basin, there could be as much as 233 billion barrels of oil trapped in the shale, worth as much as $20 trillion (see Venezuela: The Next Black Swan for Oil ETFs?).

If recoverable, this could make the vast shale deposit bigger than what we see in the enormous Canadian (Alberta) oil sands and easily get rid of Australia’s oil import problem. However, it is important to remember that this is in a remote location and that all of the oil may not be easily—or cheaply recoverable.

Still, some are starting to grow optimistic over this potential game changer. "What it could do is really turn this thing into the next boom, so where you saw coal-bed methane transform Queensland and the gas industry, shale could and I think will transform South Australia and a potential oil boom." Said Linc Energy CEO Peter Bond in a recent interview.

This trend could create a fresh bull market for Australia and allow the nation to continue to play off of huge emerging markets and their growth. This has proven to be a winning strategy for the country in years past—both in terms of economic growth and stock performance—so a continuation of this should be welcomed by investors (see Australia ETF Investing 101).

While there are a few companies that U.S. investors can buy up that target Australia, a more economical approach could be to utilize ETFs instead. These funds offer broad exposure across the market and could be ideal ways to play a continued boom in materials.

Additionally, they could also offer up some exposure to consumer firms, which could see a gain should the hydrocarbon boom trickle into these segments as well.

Due to these factors, we feel like any of these Australia ETFs highlighted below could be interesting picks for long-term investors seeking to get in to a country that has the potential for a new commodity boom:

iShares MSCI Australia Index Fund (EWA - Free Report)

This is easily the most popular Australian ETF on the market with more than $2.5 billion in AUM. It is also the cheapest, charging investors just 52 basis points while holding 70 firms in total.

Financials account for about 40% of assets, while basic materials make up another 20%. Consumer staples and real estate combine for another 17% of EWA leaving little for utilities, discretionary firms, or telecoms (see 11 Great Dividend ETFs).

The ETF also decidedly has a large cap focus with over 80% of assets going towards this segment. Still, the fund has a robust yield of 4.1% in 30 Day SEC terms, so it could be a yield destination as well for some investors.

WisdomTree Australia Dividend Fund (AUSE - Free Report)

In a distant second in terms of popularity is AUSE, a dividend focused ETF that has about $70 million in AUM. The fund costs about 58 basis points a year but has a similar amount of securities as EWA, despite tracking the WisdomTree Australia Dividend Index.

This gives the product, surprisingly, a more spread out profile with financials and consumer cyclical stocks each making up about 20% of assets. Three other segments—industrials, consumer staples, and materials—also make up double digits as well (see Developed Asia Pacific ETF Investing 101).

Mid caps are more of a focus in this ETF, though this, along with low volume, promotes a wide bid ask spread most of the time. However, the yield of nearly 4.5% in 30 Day SEC terms is quite impressive, especially for such a well-spread out fund.

IQ Australia Small Cap ETF

Another Australia pick is KROO, a fund that follows the IQ Australia Small Cap Index, holding about 100 stocks in its basket. For this exposure, investors pay about 69 basis points, though not many have embraced it so far as total AUM is below $20 million.

Still, the ETF is arguably the best bet to benefit from a shale boom thanks to just a 5% allocation to financials, and a 28% holding in industrials. Beyond those two, consumer discretionary and energy firms make up another 30% suggesting a still well-spread out profile, albeit tilted towards the broad industrial economy.

Small caps account for roughly 50% of the portfolio, with the rest going towards mid cap securities. This focus, along with low AUM, helps to push volume low and bid ask spreads wider, so total costs could be in excess of the stated expense ratio (read Australia ETFs: A Developed Market Play on Asian Growth).

This factor, along with the smallest dividend yield to offset the expenses, easily makes KROO the most expensive on the list, a factor that investors will definitely have to take into account before making their final selection. 

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