ETF XRAY

Aussie ETF (EWA), Rio Tinto & Banks

By Carl Delfeld of the Chartwell ETF Advisor

The Australian exchange-traded fund (EWA), a steady performer over the past few years, has been a bit topsy turvey during the last quarter. Normally, one would think that the trouble lies with its top holdings which are oriented to energy and commodities: the titans BHP Billiton and Rio Tinto.

Last year, BHP made an all-share bid for Rio which was pushed aside as too low and cash poor. Within the next week, BHP will have to make a decision, sweeten the deal or walk away for six months. It seems doubtful market conditions would improve by then. Given it is an all-share deal, the split of value would not change if share prices fell further and BHP could always alter the exchange ratio.

Despite this, according to the Financial Times, the market still thinks BHP will improve its terms. Rio’s shares are trading 7% cent above the proposed offer and its market capitalisation jumped by $20bn on news of BHP’s approach. Since the offer its shares have outperformed the global sector by 20 per cent.

Rio is off 4% this morning but was up strongly last week. Its share price is up 47% over the last 52 weeks but is trading at a level 28% off its year high. EWA is off 1.9% in early morning trading.

The reality is that for both sides the deal makes even more sense in a bear market than it does in a boom. Pricing power would be improved.

Actually, the problem with the Aussie ETF performance has been the financial sector which represents just under 50% of the ETF holdings, and in particular, its four dominate banks which make up collectively 20% of the exchanges market capitalization. The new government is promoting more competition and has heightened the scrutiny of bank operations. Interloper Bank of the West is also picking up market share using lower pricing as a wedge and the markets fear that overall margins are declining.

Find out how to position Australia in your global ETF portfolio by joining Chartwell ETF.

Australian Growth, Interest Rates and Currency Stay Firm

By Carl Delfeld of the Chartwell ETF Advisor and Chartwell Partners Wealth Management

Data shows that the Australian economy remains robust with labor shortages pointing to higher interest rates down the road. This shoild also firm up the Aussie dollar helping returns of the Australian exchange-traded fund (EWA).
Australia’s already low unemployment fell further, to 4.3 per cent in December, down from 4.5 per cent the previous month, and only slightly ahead of September’s 33-year-low of 4.2 per cent according to the an article by Virginia Marsh of the Financial Times.

The stronger-than-expected data came just two days after Kevin Rudd, Australia’s new prime minister, made a high profile visit to the Reserve Bank. Since he hammered Mr. Howard during the campaign on the interest rate issue, higher rates so soon after coming to power must be a tad uncomfortable.

“We are engaged in a national war against inflation,” Mr Rudd said on Thursday after announcing funding for 20,000 training places in mining, construction, health, community services and other sectors facing the most acute skill shortages. Economists are expecting next week’s data to show core inflation of 3.3 per cent for last year, ahead of the 2-3 per cent band target. Many economists believe there was little prospect of an imminent cut in New Zealand’s rates, the highest in the industrialised world at 8.25 per cent.

The Australian ETF (EWA), while down so far in 2008, was up 3.7% in trading this morning. For more on investing in Australia and ETFs, go to Chartwell ETF.