Banks may still be a four-letter word to most investors, but not in Australia. They got smacked about during the market meltdown, but that was largely a matter of guilt by association.

According to a recent International Monetary Fund report, the financial crisis has so far had a limited direct impact on the assets of Australian banks, especially large banks. The reason is that these companies have taken on much less leverage than Western banks, they have little exposure to U.S. subprime mortgage loans and derivatives, they boast conservative capital adequacy rules, and they do regular stress testing.

Westpac Banking (WBK: NYSE) is an easy way into domestic retail, corporate and institutional banking. Its shares have completely recovered from the crisis, though they have been volatile of late as investors have again shied away from banks and sold out of foreign currencies, further reducing the price of the bank's U.S.-traded shares.

Morgan Stanley bank analyst Richard Wiles is concerned about weaker margins and challenges in the commercial property market. But overall, he forecasts higher earnings for the bank as it benefits from lower loan loss charges, improving cost controls, and solid capital and provisioning levels. These factors help make Westpac the most attractive risk-adjusted value of any of the country's large banks, according to Wiles.

Fund Approach
A limited number of U.S.-traded funds offer pure Australian exposure. For market-cap-weighted exposure, there isn't anything more spot-on than the iShares MSCI Australia Index (EWA). This passively managed ETF offers a dividend yield of 3.28%, and it boasts trailing one-year returns of more than 34% and an exposure of nearly 30% to the five stocks mentioned.

American Stock Exchange-traded Aberdeen Australia Equity (IAF) is an actively managed closed-end fund that's currently trading at a slight discount to its underlying value. Though it has outperformed the broad index over the long term, in the past year it delivered a gain of just 3.89%, largely because a double-digit premium turned negative-a unique risk in closed-end fund investing. Currently, more than one-quarter of the portfolio is invested in three of the stocks discussed.

A number of Australia-based investment trusts, equivalent to our mutual funds, can be purchased by U.S. investors. The small- to mid-cap-focused Wilson HTM Priority Growth Fund, with $95 million in assets, is the best-performing diversified fund around. Since its inception in July 2005, it has soared at a compound annualized rate of more than 27% (in local currency terms) through May 2010. You need A$40,000 to get in, and the fund charges a performance fee on top of its annual expenses. But it seems worth it.

Rydex's Australian Dollar Trust CurrencyShares (FXA) offers a pure ETF play on the local currency, which over the long term has been the source of much of the country's outperformance. Over the past year through mid-June, it has gained nearly 14%. Despite its strong fundamentals, the Aussie dollar has not been a one-way ride: It lost 40% of its value during the second half of 2008, only to make most of it back by the end of 2009.

The current U.S. dollar rally is giving many currency analysts pause about the near-term prospects of the Aussie dollar. Scott Hixon, the portfolio manager of Invesco's $7 billion Global Asset Allocation Team, is bearish about the coming year because he expects investors to remain nervous about the global recovery and will continue to seek safety in the U.S. dollar. "Currently," says Hixon, "the U.S. dollar's status as the world's currency reserve trumps most fundamentals."

Over the next year, he thinks this could drive the Aussie dollar down by 10% or more against the dollar. But further out, he believes Australia's superior fiscal and trade balances, higher interest rates and correlation with rising commodity prices will eventually drive up the Australian dollar and all investments denominated in the currency.