Australia ETF (EWA): A Developed Market Play On China

by on April 8, 2010 | ETFs Mentioned:

China is on a seemingly unstoppable path to economic superpower status, as the emerging market continues to grow at an impressive rate and increase its importance  to the global economy. But one potential roadblock to China’s growth (and path towards developed status) is the ability to obtain the massive quantity of resources required to support an ongoing wave of urbanization. China has become a major trading partner of many emerging and developed markets, importing everything from copper to zinc.

It is no small task to dramatically increase the living standard of more than 1.3 billion people. In order to do so China has jumped at the chance to do business with a variety of countries, including everyone from the U.S. to the regime in the Sudan (much to the dismay of Western allies). The nation has even proposed building and paying for high-speed railroads throughout Asia in an attempt to coax poorer nations into trading infrastructure for material goods (such as coal and oil) for which China seems to have an insatiable appetite.

There are more than a dozen ETFs offering exposure to various corners of the Chinese economy. And beyond the funds in the China Equities ETFdb Category, there are several additional opportunities for indirect exposure to China. One interesting choice is a developed country that has seen its fate become increasingly tied to that of China: Australia. The two countries economies (and fortunes) are growing increasingly intertwined; China is buying up millions of dollars worth of Australian debt while Australia is an increasingly important supplier of energy resources to China. Currently, China is the largest trading partner of Australia, with $76 billion worth of trade during the 2008-2009 period; this figure surpasses the totals both Japan and the U.S.

Furthermore, China has recognized how important Australia will be to its future plans, and has ramped up investment in Australia’s material and energy sectors. CNPC has agreed with ExxonMobil to import 2.25 million tons of liquefied natural gas (LNG) annually from the Gorgon field in Australia for 20 years. Separately, three state-owned Chinese companies said they would buy stakes in Australia’s mining industry totaling $22 billion, or roughly the level of investment that China had made in the country over the past three years. Further adding to the growing connection between the two, Australia’s current Prime Minister, Kevin Rudd, is a fluent speaker of Mandarin and lived and worked in Beijing for several years. He has also called for increased cooperation between the two countries as they grow increasingly important to each other, both economically and politically.

Australia ETF Options

One way to gain indirect exposure to Chinese equities through a developed economy is the iShares MSCI Australia Index Fund (EWA), which tracks the performance of the MSCI Australia Index. The fund currently holds 76 securities and it is one of the oldest ETFs, with more than 15 years of operating history. EWA is heavily focused on two sectors; financials and materials, which combine to make up 70% of total assets. Its largest single holding is mining behemoth BHP Billiton, which makes up close to 15% of the fund; four banks round out the rest of the top five. EWA has surged higher in 2010, posting a return of about 8%.

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Disclosure: Eric is long EWA