Three ETFs To Invest In The World’s Top Stock Market

by on August 16, 2010 | ETFs Mentioned:

While many investors have focused in on emerging markets in order to bring much needed growth to their portfolios, it is a developed economy that has earned the title of the world’s top-performing equity market–since the beginning of the 20th century at least. According to a recent study by Credit Suisse, the Australian stock market has turned in the best performance over the past 110 years, posting an annualized return of 7.5% a year during that extremely long-time period. Perhaps more impressively, Australia exhibited the second lowest volatility of the 19 markets in the study (with a standard deviation of 18.2%), suggesting that the country has been able to boast strong, steady gains for decades.

This stellar return by Australia manages to beat their American counterparts by a relatively wide-margin; U.S. markets during the same time period showed gains of 6.2% a year since 1900–with a 20.4% standard deviation per year–suggesting that not only were investments in the U.S. less profitable but they were more volatile as well. “Australia has tons of coal, iron ore, uranium, zinc, nickel, and gold,” writes Howard Gold for MarketWatch, explaining some of the drivers of Australia’s solid performance. “It produces oil and natural gas, but oil imports are growing. It also grows wheat and other grains. In recent decades, the country has moved away from its Anglo-Saxon roots and embraced Asia, its rapidly growing next-door neighbor.” [also read Four ETF Plays For Dagong Global Credit's Top-Rated Countries]

The combination of Australia’s isolated location, abundance of in-demand natural resources resources, and stable political and legal systems has produced impressive stability and attractive returns over a time period longer than most investors would ever consider. Below, we profile three ETFs that offer exposure to the dynamic Australian economy for investors who believe that the country will continue to outperform global markets in this century as well [see all the ETFs that offer exposure to Australia by using our Country Exposure Tool]:

iShares MSCI Australia Index Fund (EWA)

By far the most popular ETF offering exposure to the Australian market is EWA, which has over $2 billion in assets under management and daily volume of over 5.5 million shares. The fund tracks the MSCI Australia Index, a benchmark that holds about 75 Australian stocks with a tilt towards large cap firms. The fund is heavily concentrated in two sectors; financials and industrial materials combine to make up 70% of total assets. The fund’s top holdings include mining giant BHP Billiton (14.8%), and two financial firms; Commonwealth Bank of Australia (8.9%) and Westpac Banking Corp (7.4%) [also read Warning: Five Country ETFs Heavily Focused On Financials].

IndexIQ Australia Small Cap ETF (KROO)

For investors seeking access to the small cap segment of the Australian market, KROO offers an intriguing choice. The fund tracks the IQ Australia Small Cap Index, a market cap-weighted index that seeks to provide investors with a means of tracking the overall performance of small cap Australian companies. Unlike the other funds on this list, KROO offers a minimal weighting to financials, while allocating 10.7% to energy companies and 28.9% to industrial materials firms. The fund holds about 100 individual securities in total. The fund charges an expense ratio of 0.69% [also see Three Country ETFs With Low Debt-To-GDP].

WisdomTree Pacific ex-Japan High-Yielding Equity Fund (DNH)

Although this fund does not exclusively focus on Australian companies, close to 91% of its assets go to the country with another four percent going to neighboring New Zealand. The fund holds 71 securities in total and has a heavy focus on large and giant cap securities. The WisdomTree fund also offers a heavy allocation to financials (47%), consumer services (13%), telecommunications (12%), and utilities (6%)–not a surprising sector breakdown considering the fund’s focus on high-yielding securities. According to the fact sheet DNH pays a robust dividend yield, providing investors with high levels of current income [also see Australian ETFs: Developed Market Plays On China].

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Disclosure: Eric is long EWA.