ETF Teardown: Top Australian Stocks

Noted for their simplicity and other advantages over mutual funds, exchange-traded funds have become a popular investing tool. ETFs hold a collection of stocks that share certain elements in common, so that if investors want to capitalize on companies in the land Down Under, for example, they can turn to iShares MSCI Australia Index (NYSE: EWA  ) .

But since the iShares ETF attempts to match the return of the broader Australian Stock Exchange by mimicking the MSCI Australia index, investors may not get the focused exposure to particular industries they desire. For an investor who was, say, really hip to financial institutions in the region but not so sure about growth in mining companies going forward, this ETF wouldn't fit the bill.

Well, fear not, mate -- in this edition of "ETF Teardown," we'll use some nifty tools to drill into the best of what Australia has to offer. To help, we'll use Motley Fool CAPS, our tool for screening and ranking stocks and stock pickers.

The power of tags
To help investors quickly locate great stocks, any of the 4,900 rated stocks that have been profiled in CAPS can be "tagged" with a descriptor that groups a company with others sharing a certain quality.

Selecting the "Australia" tag in CAPS presents a list of 13 investments that are either based in or have significant operations in Australia yet trade on American exchanges. This particular collection of investments has vaulted past the broader market return in the past year, up 42% versus the S&P gain of only 11%.

To get a sense of which companies the CAPS community thinks are the best opportunities in Australia today, we can review them by their CAPS star rank, denoted by one to five stars, with five being the best. Each of the individual companies can then be viewed for exactly who -- from Wall Street to Main Street -- is bullish or bearish on the company and why.

Getting down to the nitty-gritty
Here's the list of some of the Australian stocks our screen pulled up today.

Company

CAPS Rank

BHP Billiton (NYSE: BHP  )

*****

Santos (Nasdaq: STOSY  )

*****

Alumina (NYSE: AWC  )

*****

WestPac Banking (NYSE: WBK  )

****

National Australia Bank 

***

Genetic Technologies (Nasdaq: GENE  )

*

Judging by the makeup of this list of Australian stocks, you'd think the only industries in the nation were banking and raw materials. National Australia Bank and WestPac Banking are two of the largest financial institutions in the country, while BHP Billiton, Santos, and Alumina all supply basic commodities such as metals, oil, and gas. Genetic Technologies is the lone biotech company on our list from Down Under that specializes in genetics and genomics.

Investors in the CAPS community are the most prolific about mining giant BHP Billiton, with 1,008 out of 1,029 players rating the company to beat the S&P in the future. With all of the recent merger activity in the global mining and petroleum industries, there's been plenty to talk about -- BHP Billiton itself is even rumored to have an eye for Alcoa (NYSE: AA  ) or Freeport McMoRan. As prices for commodities continue to rise with the demand from burgeoning nations such as China and India, mining and metal companies are eager to gain control of already developed mines and properties that can quickly produce more ore to meet demand. Even if BHP Billiton doesn't jump headlong into the M&A fray, the diversity of assets along with the 2.1% dividend yield make the world's largest miner an attractive consideration for investors keen on commodities.

Of course, all of the cash coming from rising copper and aluminum prices has to go somewhere, and there are more than a few banks in Australia willing to do the job. One of Australia's largest banks, WestPac Banking, provides retail and institutional banking services to Australia, New Zealand, and the nearby Pacific regions. The 190-year-old company recently received approval to open a branch in Shanghai, China, to further its reach in fast-growing Asian markets. A growing asset base that stands at $266.6 billion as of March 31 and a sizable dividend yield of 4.9% are a few reasons why all eight of the CAPS All-Stars giving an opinion on the company are bullish.

You can lead a horse to water ...
Even with relative stability in the Australian market, plucking individual stocks from the land Down Under is a high-risk endeavor. Investors should always perform their own due diligence on companies rather than take a recommendation -- after all, even the best stock pickers can be horribly wrong on a stock.

So do you agree that banking is the best place to be in Australia? Or is mining still the better play? Give your own opinion in Motley Fool CAPS.

Motley Fool Global Gains can help you find some of the greatest investment opportunities beyond our borders. Check out our international-investing service free for 30 days.

Fool contributor Dave Mock loves doing the teardown part -- it's the put-back-together part he hates. He owns no shares of companies mentioned here. Dave is the author of The Qualcomm Equation. The Fool has a disclosure policy.


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