South Korea Keeps Rates Unchanged: ETFs In Focus

Bank of Korea kept its benchmark interest rate intact in its July 13, 2017 meeting for the 13th straight month. The policy board voted to keep the seven-day rate at a record low of 1.25% as it aims at building a business supporting environment to tackle subdued economic growth issues the country faces. Weak private consumption and low job-growth are contributing to South Korea’s woes.

The country’s consumer prices grew 1.9% in June on a year-over-year basis compared with a 2% increase in May, and is expected to hover around the central bank’s target of 2% throughout the year.

The central bank raised its GDP growth forecast to 2.8% compared with its earlier prediction of 2.6% in April. The primary reason for the optimistic outlook is a recovery in exports, which is a major determinant of the country’s performance. South Korean exports grew 13.7% in June on a year-over-year basis (read: Asia Business Optimism at 3-Year High: ETFs in Focus).

The surge in exports undermined the issues reflected by weak domestic consumption and prevalent geopolitical risks, as exports account for almost 50% of the country’s GDP. However, the country still faces risks of rising trade protectionism around the world.

Recently, Moon Jae-In’s office urged the parliament to clear a $10 billion stimulus package to increase jobs in the country. However, it was blocked by opposition parties on concerns over the package being unsustainable. Though the central bank governor Lee Ju-yeol expects the stimulus to further expand the GDP, it was not included in the most recent estimates (read: South Korea ETFs in Focus on $10 Billion Stimulus).

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 39.44%, 14.78% and 12.47% allocation, respectively (as of July 12, 2017). Samsung Electronics (KS:005930) Ltd, Sk Hynix Inc and Naver Corp are the top three stocks with 23.77%, 4.96%, and 2.84% allocation, respectively (as of July 12, 2017). The fund has returned 27.18% in the last one year and 29.86% year to date (as of July 13, 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 $9.93 million and is relatively expensive as it charges 84 basis points in fees per year. From a sector look, Information Technology, Industrials and Consumer Discretionary take the top three spots, with 29.5%, 18.6% and 12.2% allocation, respectively (as of May 31, 2017). Samsung Electronics Co Ltd, Naver Corp and Posco are the top three stocks with 18.6%, 3.93% and 3.60% allocation, respectively (as of May 31, 2017). The fund has returned 20.91% year to date (as of July 13, 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 $5.36 million and is relatively expensive as it charges 80 basis points in fees per year. From a sector look, Financials, Industrials and Materials occupy the top three spots, with 19.94%, 18.56% and 15.94% allocation, respectively (as of July 13, 2017). Hanwha Chemical Corp, Posco and Hana Financial Group Inc. are the top three stocks with 3.67%, 3.55% and 3.46% allocation, respectively (as of July 13, 2017). The fund returned 17.26% in the last one year and 23.81% year to date (as of July 13, 2017).

Bottom Line

Despite impressive exports, the economy still faces major headwinds. With increased threats from North Korea escalating geopolitical risks and subdued employment growth, it is still difficult to predict the path economic growth will take in Asia’s 4th largest economy. Therefore, we believe it is best to remain on the sidelines for now.

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