Investing in specific markets or regions has always been about one thing: the trade-off for higher returns in emerging markets and lower risk in developed markets. 

#-ad_banner-#Emerging markets like the BRIC nations — Brazil, Russia, India and China — have long promised high rates of economic growth and soaring stock values. Unfortunately, as any emerging-markets investor during the past couple of years can tell you, these markets are also likely to underperform spectacularly on fears of a debt bubble or geopolitical problems. 

In contrast, developed markets like the United States and Europe offer relative peace of mind but weaker returns over the long run. An investment in the iShares MSCI EAFE (NYSE: EFA), an exchange-traded fund invested in developed markets, over the past 10 years would have exposed you to just three-quarters the volatility of the iShares Emerging Markets Fund (NYSE: EEM) — but yielded a compound annualized return of just 7%. 

However, there’s a way to combine the rapid growth of emerging markets and the safety of developed markets — and you can find it in one country. 

This year marks the country’s 23rd consecutive year of economic growth. This country’s stable political backdrop and investor-friendly environment means investors can sleep well at night without worrying about the next coup or corruption scandal. Perhaps best of all, this country is a key trading partner with the world’s fastest-growing economy.

From Penal Colony To Powerhouse
I am talking about Australia, a country that most investors are not even considering. For instance, the average daily trading volume of the iShares MSCI Australia (NYSE: EWA) ETF is just 1.5 million shares. Compare that with the iShares China Large Cap (NYSE: FXI) ETF’s average daily volume of 22.5 million shares. 

Australia isn’t an emerging market, but neither is it a major developed market. Investors only looking for the headline emerging markets or the relative safety of U.S. or European markets are missing a huge opportunity. 

Economic growth in Australia has increased consistently, and few countries or regions can match its cumulative growth. In fact, Australia’s economy outgrew Latin America’s over the nearly three decades to 2012. If you exclude Chinese growth, Australia would have beaten the East Asia/Pacific region as well. 

China is Australia’s largest trading partner and a natural choice for its commodity needs. Iron ore and coal are Australia’s top exports but it also exports large amounts of wheat, gold and natural gas. Slowing growth in China has led to weakness in Australia’s mining sector over the past few years, but the market is overlooking the sheer magnitude of Chinese growth. 

Even with its growth slowing, China’s $8.8 trillion economy is expected to grow 7.5% this year. With the daily drumbeat of news about the slowing Chinese economy, investors may be overlooking the bigger picture — the world’s second-largest economy is still growing at more than twice the rate of other developed markets. 

This will continue to drive its needs for commodities well into the future and benefit Australia’s economy even as the Australian government focuses on growth in other sectors.

Glenn Stevens, the governor of the Reserve Bank of Australia, recently told Bloomberg that efforts to reposition the economy look to be paying off. Australia’s economy grew 3.5% in the first quarter from the prior year, the fastest pace in nearly two years, on resource exports and domestic demand. The jump in exports shows that China’s hunger for commodities still has room to surprise. 

Strength in the economy led to a strong Aussie dollar that reached A$0.95 to the U.S. dollar early last year and weighed on exports. The central bank cut rates to help weaken the currency and boost the economy, sending the Aussie to a four-year low of A$1.14 to the USD. The Aussie dollar has since rebounded to A$1.07, but that’s still weak enough to drive exports. 

A Diversified Investment With One Fund
The iShares MSCI Australia ETF gives investors access to 71 companies, many of which are not listed on U.S. exchanges. Since 2001, EAW has widely outperformed the S&P 500 Index and the iShares MSCI emerging- and developed-markets funds with a cumulative dividend-adjusted return of 377%: 

The fund pays a huge dividend yield of 4.3%, well above the yields on the developed- and emerging-markets funds (2.4% and 2%, respectively), providing consistent cash flow even when market returns weaken.

The trailing price-to-earnings (P/E) ratio has crept up to 20 but is still cheaper than the iShares MSCI EAFE ETF’s 20.8 and only slightly more expensive than the iShares MSCI Emerging Markets ETF’s 19.2. Fund holdings are concentrated in financials with 51% of assets, followed by materials (18%), consumer staples (9%), health care (7%) and industrials (5%). The top 10 holdings account for 62% of total assets.

The fund has a beta of 0.96 versus the S&P 500, well below the 1.05 for both the developed- and emerging-markets funds — but I think this measure of volatility overlooks the consistent nature of Australia’s growth and the big picture on China’s growth. 

Risks to Consider: The Australia fund does not hedge its currency exposure, so the price may fluctuate with the Australian dollar. Investors may also see some volatility around weak Chinese economic numbers but should look past the near-term data to the longer-term trend.

Action to Take –> While I would never recommend putting all your proverbial eggs in one country’s basket of stocks, the iShares MSCI Australia fund provides all the safety of a developed market with higher returns tied to emerging market growth. The fund pays a stunning dividend yield and should continue to do well as Australia’s economy continues to grow.

The iShares MSCI Australia ETF makes a great investment for yield-starved investors. But did you know that 79% of the world’s highest-yielding stocks are actually overseas? In fact, we’ve found 93 stocks that yield 12% or more, including some of the safest, highest-yielding stocks the world has to offer. To get more information on these stocks, follow this link.