ETF Investing in Australia: EWA, AUSE or FAUS?

I recently published an article on why I’d not invest in ETFs. In that article I also discussed the reasons to actually invest in an ETF as well. One big reason can be that you want an exposure to the stocks in a country that you don’t necessarily know well enough to pick individually. One such country would be Australia. Australia has the big 4 banking corporations which are considered solid: Commonwealth Bank of Australia, WestPac Banking Corp, ANZ and National Australia Bank Ltd. These corporations usually have yields that fall under my desired range of yields. But to pick one stock out of these would require a lot of research. The second biggest sector in Australia would be Materials, again a sector where it is tough for me to pick up individual stocks. Hence, I decided to invest in an Australia focused ETF. Australia also has a dividend withholding tax which dampens the initially high looking yields.

I considered three ETFs to invest in Australia: EWA (iShares MSCI Australia ETF), AUSE (WisdomTree Australia Dividend Fund) and FAUS (First Trust Australia AlphaDex Fund). As my primary aim is to generate income, all these three funds have a dividend yield of over 4% which satisfies my criteria. Do note that this is on a pre-tax basis.

*as of 22-Nov-2013

Parameters	EWA	AUSE	FAUS
AUM (mil USD)	2073	58	1.6
Expense Ratio	0.53%	0.58%	0.80%
Inception Date	12-Mar-96	16-Jun-06	15-Feb-12
Dividend Yield	5.50%	4.08%	4.70%
Number of Holdings	72	65	42
% Assets in Top 10 Holdings	60.19%	27.98%	41.98%
PE Ratio	14.95	15.65	n/a
Standard Deviation	1.37%	3.53%	n/a
Sector	EWA	AUSE	FAUS
Financial Services	42.48%	19.94%	7.42%
Basic Materials	16.93%	15.39%	18.70%
Consumer Defensive	9.49%	15.98%	9.98%
Real Estate	7.44%	0.00%	10.09%
Energy	5.73%	7.62%	8.04%
Industrials	5.34%	11.25%	12.42%
Health Care	4.30%	6.44%	7.77%
Consumer Cyclical	2.83%	13.10%	13.19%
Communication Services	2.01%	3.70%	6.03%
Utilities	1.50%	2.94%	2.51%
Technology	0.79%	3.64%	3.33%
Market Cap Breakdown	EWA	AUSE	FAUS
Giant	50.61%	19.79%	2.40%
Large	32.92%	27.56%	24.81%
Medium	11.06%	50%	70.57%
Small	0.00%	0.00%	0.00%
Micro	0.00%	0.00%	0.00%

Clearly EWA has been around for a while and has large AUM (2B) compared to very small for AUSE (58M) and FAUS (2M). Expense ratio is also the smalles for EWA at 0.53%. While FAUS and AUSE have more diversified sector exposure, their exposure to medium cap stocks is quite large for my appetite. EWA is a bit concentrated on Financial Services and Basic Materials. But they are the stocks that will do well when the economy picks up especially demand from emerging markets. Finally the PE ratio is most attractive for EWA, and standard deviation (1.37%) is also much better than AUSE (3.53%). I’m expecting FAUS to be on the higher side too given such high exposure to medium cap stocks. EWA would not be the pick for those who are not comfortable with such large exposure to Financials. But given my portfolio so far has exposure to only Utilities and Pharma, I’m quite comfortable with this. EWA would be my top pick here.

I bought 31 units of EWA on for $25.64/unit on 22-Nov-2013 for my Zen Fund.

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Avoid Debt to buy Property

I don't like the fact that most of my initial monthly payments on a home loan go to pay interest while my principle outstanding reduces at a very slow rate. Hence, I have decided to avoid taking debt to buy a property. I know that the goal is to have 5 real estate properties for the family by Dec 2020 and it is going to be tough doing that without taking any loans. But that is exactly the point. I want to own those properties and not owe money on them. We'll see where this decision takes me. This might mean that I buy land plots and get houses constructed as and when I have spare cash.

If you are in an area where interest rates are all time low and you can get a fixed rate loan, there couldn't be a better thing to do than take up a loan. But do investigate well before you invest as when it comes to real estate investments the most important three things are Location, Location and Location!

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Why I'm not Investing in ETFs?

ETF is surely a good lazy man's tool for investing. Because we can't know everything about all the companies, it makes sense to go invest in ETFs for diversification. But is it definitely a better way? It might be for some people who have absolutely no idea about the companies. But I'd recommend them not to invest in stocks at all. Warren Buffett only invests in companies he understands. That is the reason that he never invested in Tech stocks until he finally did in IBM recently. It is hard to beat the market on an average by stock picking. So it is not a surety that even after investing hours and hours into doing research you will be able to outperform the market. So, we can agree that some of the Mutual Funds and ETFs provide a good solution if one just wants to mimic market performance. It saves a lot of time. However, now that there are thousands of ETFs to pick from, selecting an ETF to invest in itself would be quite a task.

The other big advantage of being able to invest in ETFs is that we can get exposures to markets that we can't easily get knowledge about. Let's say the Spanish stocks have been beaten down badly recently and we want to get some exposure to the upside there, it would take a lot of time to research and pick stocks in Spain, not to mention it won't be easy to beat the market without enough research. For this scenario a Spanish stocks large cap ETF might be a perfect solution.

Now that we agree that there are some definite advantages to investing in ETFs, I want to answer why I haven't invested in ETFs yet. Firstly, I have started to feel that a correction is now due and I don't want to put money into ETFs only to find myself go through the whole correction and recovery cycle again. I'd rather hold cash. Secondly, I'm looking at only income generating stocks for my portfolio. While ETFs are well diversified, when I research on their holdings I usually find some low yielding stocks in there that I don't necessarily like to hold. If I invest I would be forced to hold them even when I don't like it. I want to have more control there.

If the valuations do become more attractive in the market and I decide to invest, I'd be doing that in installments over a period of time. I do not recommend investing lumpsum amounts into the market. If you do a historical analysis when investing lumpsum your return over the years depends heavily on the valuation you invested in. I'd divide my amount into equal small parts and invest them each month into ETFs. Some do believe that the market is not fully valued yet and there is still some upside. If you want to invest now, do follow this method to average out the price over a period of time and avoid buying a big chunk at the peak levels.

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Travel Goals - 100 Cities

One of my travel goals is to live at least one week each in 100 different cities across the world. I'll share my progress on that here.

1. Singapore: Oct2013-Present
2. Hong Kong: Sep2012-Sep2013
3. Mumbai, India: Apr2012-Aug2012
4. Lille, France: Sep2011-Dec2011

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Travel Goal - Visit 100 Countries

Countries I have visited

1. Austria
2. Belgium
3. Bhutan
4. Czech Republic
5. Denmark
6. France
7. Germany
8. Hong Kong
9. Hungary
10. India
11. Italy
12. Luxemberg
13. Malaysia
14. Maldives
15. Monaco
16. Netherlands
17. Norway
18. Singapore
19. Slovenia
20. Spain
21. Sweden
22. Switzerland
23. Thailand
24. Vatican City

Countries I have to Visit

1. Argentina
2. Brazil
3. China
4. Egypt
5. England
6. Greece
7. Indonesia
8. Ireland
9. Mexico
10. Philippines
11. Portugal
12. Scotland
13. Sri Lanka
14. United States of America

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Real Estate Portfolio

My goal is to have 5 Real Estate properties by December 2020 between me and my wife.

I will be looking at a mix of both rental generating units as well as land property at good locations that has a chance of appreciation over the period of next 5-10 years.

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Passive Income from Websites

I have one other website that I'm running (not actively adding content nowadays). I'd like to share my progress, even if modest in terms of adsense income. TheZenFund.com is currently not generating any ad revenue as I'm still building content for this.

$0.25 - Jul 2012

$1.97 - Aug 2012

$9.09 - Sep 2012

$6.03 - Oct 2012

$3.66 - Nov 2012

$4.27 - Dec 2012

Total for 2012 - $25.26

$3.13 - Jan 2013

$2.15 - Feb 2013

$3.27 - Mar 2013

$1.66 - Apr 2013

$1.39 - May 2013

$2.88 - Jun 2013

$3.45 - July 2013

$1.57 - Aug 2013

$1.90 - Sep 2013

$1.32 - Oct 2013

         - Nov 2013

         - Dec 2013

Total for 2013 - $23.46 (till Nov 15, 2013)

My Goal is to achieve $6,000/month through passive income from my websites by December 2020.

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Zen Fund - A Financial Freedom Project

After analyzing the various methods of generating passive income, I have found that the method of investing in dividend growth stocks identifies closely with me personally. Being inspired by others who are investing in dividend growth stocks regularly, I have decided to document all my investments here on this blog as soon as I make them. I'll also try to share regularly how my portfolio looks and what dividends I'm receiving.

My goal is to achieve financial freedom through dividend income. This doesn't necessarily mean that I will leave my job but I want to feel free to be able to choose my own path without the need for money. I want to achieve a portfolio value of USD 500k in 7 years. I won't invest in any stocks whose current yield is less than 4%. So, assuming no stocks cut dividends, I want to be receiving 4%+ on a yield to cost basis from my portfolio. This amounts to USD 20k/year from dividend income from my Zen Fund.

Right now most of the things are looking full-valued, so I need to be extra careful in picking stocks as I don't want to see my stock get beaten down badly when the market corrects, which I'm expecting would happen in 2014. QE tapering coupled with rising interest rates would mean a lot of money might be moved from equity holdings to fixed income investments. This would put downward pressure on the stocks. I'm actually looking forward to that 'correction' as an opportunity to invest in some solid stocks at attractive valuations. Right now I'm saving away some cash for that investment while I keep investing in the stocks that would still be good on Yield to Cost basis if the market corrects in 2014.

Keeping that in mind I recently decided to buy BP just before the dividend increase and quarterly earnings report was released. However, I wasn't able to execute the trade on my account due to some operational issues. While I regret that I couldn't be part of the big move that followed in BP stock, I am still happy with my call. BP was certainly my top pick. My other two being AstraZeneca and National Grid. I'll be buying both of them from London Stock Exchange as there is no tax withholding tax on dividends in UK. Both these stocks have investor friendly policies and continue to return capital through dividends and dividend increases. Healthcare and Utilities sector also looks attractive to me and I expect it to outperform the market when the market corrects.

I bought 25 shares of AstraZeneca at GBP 32.77 and 100 shares of National Grid at GBP 7.87. Both stocks will give me a 5%+ yield and I expect to receive around GBP 84 in dividends from my current portfolio (Average GBP 7/month). The payout ratios are on the higher side at 74% for AstraZeneca and 66% for National Grid, however this is still acceptable for a single digit dividend growth rate for these stocks. I would be looking to add more of these stocks in the future when the price comes down, preferable when they give around 6% yield (maybe that's too ambitious but we'll see). However, my immediate goal would be to look for another sector for investments to diversify. Any Suggestions?

I am considering investing in REITs but I'm not entirely convinced on the growth story there. The dividend payouts seem to be quite high (90%+) for some of the names and so it seems not very sustainable. But 8%+ yield would still be good enough for me to just earn and not worry too much about fast rental increases. Once I shortlist any names, I'll share with you guys on this blog.

Inspired by my fellow bloggers, I'll also try to share my income and expenses for each month as I try to achieve my goal.

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