Aussie Tax Plan Slams An Unknown ETF

Australia's proposed 40% tax hike on mining companies operating there has sent shockwaves through the materials sector, rattling individual stocks like BHP Billiton BHP and Rio Tinto and a broad swath of ETFs. Government officials down under are taking a page from their American counterparts by throwing out an outlandish election year proposal aimed at a controversial industry. Whether or not the tax sees the light of day remains to be seen and press reports have said the tax hike, if passed, wouldn't take effect until 2012. That would give the market time to "price in" the negative impact on mining firms. As for short opportunities if this tax is passed, look beyond the usual suspects and by that the Professor means Australia-spefic ETFs like the iShares MSCI Australia Index EWA and the IQ Australian Small Cap KROO. Perhaps the best short opportunity for the Aussie tax hike is the iShares S&P Global Materials ETF MXI. Fifteen percent of MXI's weight is devoted to BHP Billiton and Rio Tinto, making this ETF extremely vulnerable to passage of the tax hike. MXI is up about 5% today, but that doesn't erase the 15% loss the ETF had endured in the past month heading into today's trading session. This bounce is attributable to positive sentiment in the broader market and it is best to believe that MXI can move down again even if the broader market moves higher because it is only a matter of time before more bears realize MXI is fertile shorting ground if the tax hike becomes more of a reality. The Aussie government seems to realize the negative impact this proposal is having on global equity markets and government officials are saying there is open dialogue with mining companies. On the other hand, BHP and Rio Tinto are saying talks are not progressing and that could take some of today's air of MXI's balloon.