A Kool Kiwi: New Zealand ETF Races Higher

Forty-two (42) exchange-traded funds hit all-time highs on Thursday, and nearly all of those were U.S.-focused funds. One of the small number of international ETFs to touch a new high Thursday was the iShares MSCI New Zealand Capped ETF (iShares TrustENZL).

Geographics Don't Always Equal Correlation

ENZL is now up nearly 18 percent year-to-date, and it is a quiet 18 percent at that. Logically, some global investors believe Australian and New Zealand stocks are tightly correlated. That has not been the case this year, as the iShares MSCI Australia Index Fund (ETF) EWA is higher by just 1.5 percent. A rebounding New Zealand dollar is helping ENZL trek higher.

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At the start of this year, 64 U.S. cents bought one New Zealand dollar. At this writing, it takes about 72.5 cents to buy one kiwi, and that kiwi strength has come without the benefit of interest rate hikes. The Reserve Bank of New Zealand (RBNZ), like its peer in Australia, has been cutting interest rates, but that policy is at risk of ceasing in the near term.

“Traders pared bets on a New Zealand interest-rate cut next month after the central bank said further reductions could pose a risk to financial stability by throwing fuel on an overheated housing market,” according to Bloomberg.

Real Estate And Fed Factors

However, the housing market song and dance is one frequently performed by the RBNZ. In March, RBNZ lowered interest rates to 2.25 percent in a move widely regarded as surprising. Why that view was surprising is actually what is surprising because prior to the cut last week, RBNZ had already pared borrowing cuts four times in the past year and long gone have been the days when it looked like RBNZ would join with the Federal Reserve as the developed market central banks bold enough to raise rates.

Put it this way: New Zealand's benchmark borrowing rate of 2.25 percent is high by developed world standards and arguably enticing to foreign investors, but that does not mean RBNZ is shy about cutting rates. As recently as 2008, New Zealand's interest rates were as high as 8 percent.

ENZL's trailing 12-month dividend yield is 3.83 percent, and the ETF has some allure, as a satellite position for yield investors. In some ways, ENZL looks like U.S. high dividend ETF with a combined allocation of almost 30 percent to utilities and telecom stocks. ENZL's three-year standard deviation is almost 20 percent.