South Korea ETFs In Focus On Rising Military Tensions

The U.S. Navy’s Carl Vinson carrier strike group, originally stationed near Singapore, was diverted toward the Korean Peninsula on Sunday, April 9, 2017, as Kim Jong Un’s North Korean regime prepares to hold a huge military parade on April 15, 2017. The parade will mark the 105th birth anniversary of its founding president Kim II-Sung.

This move comes in the wake of rising tensions related to North Korea’s nuclear policies. We note that U.S. President Trump and his Chinese counterpart Xi Jinping recently addressed the political and economic disputes related to North Korea at the Florida summit (read: What China ETF Investors Should Watch for in Trump-Xi Summit)

The issues with North Korea are quite complex, specifically because any action against them would bring in South Korea and Japan into the picture as well. Japan has been really concerned lately with North Korea’s reckless and irresponsible missile tests in its direction and has been in close touch with Trump to seek assurance of U.S. protection.

North Korea’s continuous disregard of the UN resolutions regarding testing of missiles has prompted South Korea to test its defense system. One of the options includes deploying tactical nuclear weapons in South Korea, but this will require the approval of the government. The current situation has prompted South Korea to assess the earliest possible deployment of the Terminal High Altitude Area Defense (THAAD), a defense system to destroy incoming missiles at a high altitude, to the Korean Peninsula to respond to threats as and when they arise.

Whether such an action is possible or not depends greatly on the Presidential elections in South Korea in May this year. One of South Korea's Presidential candidates, Moon Jae-in, looks to adopt a far less hard-line approach on its northern neighbor, compared to the other front runner candidate Ahn Cheol-soo (read: Will North Korea Spell Trouble For These ETFs?).

Though the future course of action is unclear, the recent step is surely in response to the reckless behavior of North Korea. However, South Korea’s future stance and its working relations with the U.S. will depend greatly on who becomes the next president.

Let’s discuss a few South Korea ETFs.

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 $3.23 billion and charges 64 basis points in fees per year. Information Technology, Financials, and Consumer Discretionary take the top three spots with 36.81%, 14.23%, and 13.28% allocation, respectively (as of April 6, 2017). Samsung Electronics (KS:005930) LTD, Sk Hynix INC, and Naver Corp are the top three stocks with 23.0%, 3.96%, and 3.24% allocation, respectively (as of April 6, 2017). The fund returned 16.12% in the past one year and 13.40% in the year-to-date time frame (as of April 7, 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 $9.03 million and is relatively expensive as it charges 99 basis points in fees per year. Information Technology, Industrials, and Consumer Discretionary take the top three spots with 27%, 20%, and 13% allocation, respectively (as of February 28, 2017). Samsung Electronics Co LTD, Naver Corp, and Hyundai Heavy Industries Co LTD are the top three stocks with 17.47%, 3.82%, and 2.52% allocation, respectively (as of February 28, 2017). The fund returned 12.03% in the year-to-date time frame (as of April 7, 2017).

First Trust South Korea AlphaDEX Fund FKO

This fund seeks to employ quantitative based screening techniques to identify stocks poised to generate great alpha.

It has AUM of $4.87 million and is relatively expensive as it charges 80 basis points in fees per year. Industrials, Financials, and Consumer Discretionary take the top three spots with 19.98%, 18.49%, and 15.81% allocation, respectively (as of April 6, 2017). Hyundai Engineering & Construction Co LTD, Hyundai Heavy Industries Co LTD, and Hanwha Chemical Corp are the top three stocks with 3.67%, 3.59%, and 3.35% allocation, respectively (as of April 6, 2017). The fund returned 1.54% in the past one year and 11.9% in the year-to-date time frame (as of April 7, 2017).

To Conclude

The performance of these ETFs has been satisfactory and in a close range in the year-to-date time frame. However, there is high uncertainty surrounding the presidential elections. Unpredictable military moves by North Korea may further complicate the situation.

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