Australia ETFs In Focus Amid Electoral Uncertainty

by on August 24, 2010 | ETFs Mentioned:

After weekend elections failed to produce a clear cut winner in Australia, the country’s political future remains uncertain as the two major parties scramble to hammer out deals with would-be kingmakers. That uncertainty has weighed on financial markets down under in recent days, as investors await resolution on major pieces of policy whose fate could be determined in coming days.

Seventy-six seats in the lower house are needed to form a government in Australia. The Liberal-National coalition led by Tony Abbott recently had claimed 71, while the ruling Labor Party of Julia Gillard, Australia’s first prime minister, had 70 seats. Three more seats are held by independents and one by a Greens party candidate; four seats are still undecided [see ETF Ideas For An Ex-Europe Portfolio].

Perhaps the most critical issue hanging in the balance is a proposed “super-tax” on mining profits. The controversial proposal calls for a 30% tax on profits of iron ore and coal producers, such as BHP Billiton and Rio Tinto, with the proceeds being distributed to other areas of the country [use the Stock Lookup Tool to find ETFs with exposure to BHPLF and RIO]. Investors have expressed concerns that the tax would send jobs and investment overseas while proponents have argued that it is a necessary redistribution of wealth.

Abbott has vowed to scrap the proposed mining tax, so a victory by his Liberal-National coalition would seemingly be the most favorable outcome for investors and could give the mining industry a bump. Gillard, who took over as prime minister after Kevin Rudd was forced out over the unpopular tax, has vowed to retain the tax. “I entered a breakthrough agreement with the Australian miners, our biggest miners, about the Minerals Resource Rent Tax and I will be honouring that agreement,” Gillard told reporters in Canberra. Rudd’s original plan had called for a 40% tax on mining profits; Gillard reached an agreement with Rio Tinto, BHP Billiton, and Xstrata that lowered that rate to 30% [also read Will Resource Tax Sink Australia ETF?].

So the fate of the mining tax perhaps comes down to the formation of alliances in coming days. “If the Liberals were to form a government, there’s no mining tax,” said Peter Chilton, a fund manager at Constellation Capital Management Ltd., in an interview with Bloomberg. “That’s potentially positive for the mining sector. If Labor forms an arrangement with the Greens, there’s more uncertainty.”

Australia ETFs In Focus

Ahead of most elections, investors have fully priced in the expected impact of policy shifts. But given that the outcome in Australia is too close to call, as well as the fact that such a significant piece of legislation could still seemingly go either way, Australian markets figure to be watching political developments quite closely in coming days. Below, we profile ETFs that could be on the move as this saga plays out [use the Country Lookup Tool to identify all equity ETFs with exposure to Australia]:

  • iShares MSCI Australia Index Fund (EWA): This ETF offers exposure to large cap Australian companies, including many of those that would be impacted by the proposed mining tax. BHP Billiton makes up about 15% of EWA’a assets, while Rio Tinto accounts for another 3% or so. Besides mining companies, EWA maintains a heavy allocation towards banks; the financial sector represents about 45% of the fund’s assets. EWA struggled in 2010, losing about 10% on the year. This ETF charges an expense ratio of 0.52% [see Three ETFs To Invest In The World's Best Stock Market].

  • IndexIQ Australia Small Cap ETF (KROO): This cleverly-named ETF offers a slightly different brand of Australian equity exposure, focusing on small cap stocks. As such, KROO’s 100 holdings have very little overlap with those of EWA. From a sector perspective, KROO is heavy in industrial materials (29%) and energy (11%) [also see Talking Hedge Fund ETFs, Inflation-Proofing, And More With Adam Patti].

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Disclosure: No positions at time of writing.