Can South Korea ETFs Continue

South Korea’s central bank held its benchmark seven-day repurchase rate steady at 1.25%, as expected by 19 economists surveyed by Bloomberg. Bank of Korea thinks that the economy is not strong enough to sustain a rate hike, as the country weighs the impact of rising geopolitical risks relating to North Korea on its economy (read: Low Volatility ETFs to Buy If North Korea Tensions Flare Up).

The country’s consumer prices grew 2.2% in July on a year-over-year basis compared with a 1.9% increase in June. Core CPI, which excludes food and oil prices, increased 1.8% year over year in July compared with a 1.4% increase in June.

Most recently, North Korea tested another ballistic missile, which flew over the Japanese territory. This resulted in a decline in the South Korean won. North Korean premier Kim Jong-un went to the extent of stating that this test was a prelude to the fate of Guam if the United States President Donald Trump does not stop his threats. In response, Trump tweeted, “The U.S. has been talking to North Korea, and paying them extortion money, for 25 years. Talking is not the answer!”

South Korean exports increased for the ninth straight month in July and are expected to expand further in August. It expanded nearly 20% year over year owing to increased global demand and improving global economic sentiment.

The central bank maintained its GDP growth forecast of 3% for July. Although the global recovery and strong demand calls for a further optimistic outlook, the tensions relating to North Korea have been mounting, thus nullifying the positives. Adding to the agony, the unpredictable nature of the North Korean premier makes it difficult to predict the future course of this prevailing set of events.

Although the economy is performing well, there are certain risks weighing down the outlook. The government is aiming at cooling down the property market with a rise in capital gains tax and also slowing the rising debt by imposing stricter mortgage rules. This may hurt the construction sector (read: South Korea Exports Surge: ETFs in Focus).

Moreover, most recently, the heir to Samsung, South Korea’s largest chaebol (business conglomerate), Jay Y. Lee was sentenced to five years in prison for a bribery allegation that also led to the ouster of the country’s president earlier this year. This presents massive uncertainty regarding the leadership of the company and might have undesirable consequences in the long term.

Let us now discuss a few ETFs focusing on providing exposure to South Korea (see all Asia-Pacific (Developed) ETFs here).

iShares MSCI South Korea Capped ETF EWY

This fund is the most popular in the space offering exposure to South Korean equities.

It has AUM of $3.81 billion and charges 64 basis points in fees per year. From a sector look, Information Technology, Financials and Consumer Discretionary take the top three spots, with 38.01%, 15.09% and 12.46% allocation, respectively (as of August 29, 2017). Samsung Electronics (KS:005930) Ltd, Sk Hynix Inc and Posco are the top three stocks with 22.18%, 4.92%, and 3.15% allocation, respectively (as of August 29, 2017). The fund has returned 21.04% in the last one year and 23.55% year to date (as of August 30, 2017).

AdvisorShares KIM Korea Equity ETF (TO:KOR)

This fund seeks to offer exposure to South Korean growth equities in the mid-to-large cap segment.

It has AUM of $10.09 million and is relatively expensive as it charges 99 basis points in fees per year. From a sector look, Information Technology, Industrials and Consumer Discretionary take the top three spots, with 32.0%, 19% and 13% allocation, respectively (as of July 31, 2017). Samsung Electronics Co Ltd, Posco and KB Financial Group Inc are the top three stocks with 19.44%, 4.36% and 4.04% allocation, respectively (as of July 31, 2017). The fund has returned 24.66% year to date (as of August 30, 2017).

Bottom Line

Despite the economy being on solid ground, there are still major headwinds. With increased threats from North Korea escalating geopolitical risks and massive changes in property tax code, it is still difficult to predict the path economic growth will take in Korea’s economy and how the central bank will go about its interest rate policy in the coming months.

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