What Lies Ahead For South Korea ETFs?

South Korea’s GDP grew 1.4% sequentially in the July-August period, marking the fastest growth rate since the second quarter of 2010. It grew 3.6% annually compared with 2.7% in the June quarter and surpassed expectations of a 3% increase.

Factors Driving GDP Growth

Expansion in construction investments and strong exports drove growth in the South Korean economy. While Construction investment expanded 1.5% sequentially, exports grew 6.1%. Global demand for South Korean electronics has been on an upward trend, as chipmakers enjoy robust demand. Per a Reuters article, overseas sales of memory chips amounted to $9.69 billion in September.

Moreover, South Korea’s biggest electronics company, Samsung, has registered impressive performance this year. This came despite recent cases of cell phones bursting and the corruption scandal surrounding Jay Y. Lee, heir to Samsung.

Exports constitute over 40% of South Korea’s GDP. Per the Ministry of Trade, Industry and Energy, South Korean parts and component exports increased 12.5% year over year to $208.9 billion in the January-September period.

South Korea’s central bank held its benchmark seven-day repurchase rate intact at 1.25% in its October meeting. A slew of upbeat economic data has increased expectations of an imminent rate hike in the Nov 30 meeting of the Bank of Korea.

Risks Involved

Although strong exports bolstered GDP growth, South Korea has been witnessing a sharp drop in Chinese tourists and difficulties for firms operating in China. This is primarily because of increased tensions between the United States and China, as deployment of a U.S. missile defense system in South Korea was not welcomed by China. Therefore, a drop in tourism has been hurting the economy as it is heavily dependent on Chinese tourists.

The South Korean economy is also privy to the prevailing geopolitical risks. North Korea has been continuously testing missiles to develop a nuclear program in order to safeguard itself from potential U.S. invasion, per North Korean leader Kim Jong-Un. Moreover, North Korean diplomats have said that they have the potential of firing missiles to the U.S. mainland (read: ETF Strategies to Benefit from North Korea Tensions).

In a latest development, experts are expecting North Korea to conduct another nuclear test this week, as U.S. President Donald Trump is scheduled to visit China and South Korea later this week (read: Safe Haven ETFs Gain Amid Geopolitical Threats).

Although the global recovery and strong demand calls for a further optimistic outlook, tensions relating to North Korea have been mounting. 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.

Despite the economy 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 slowing the rising debt by imposing stricter mortgage rules. This may hurt the construction sector.

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 $3.9 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 40.1%, 14.3% and 12.3% allocation, respectively (as of Oct 26, 2017). Samsung Electronics (KS:005930) Ltd, Sk Hynix Inc and Posco are the top three stocks with 23.7%, 5.4%, and 2.9% allocation, respectively (as of Oct 26, 2017). The fund has returned 33.1% in a year and 38.1% year to date (as of Oct 27, 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 $10.6 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 37.0%, 16.0% and 14.0% allocation, respectively (as of Sep 30, 2017). Samsung Electronics Co Ltd, Hyundai Motor Co and NAVER Corp are the top three stocks with 20.3%, 4.6% and 3.8% allocation, respectively (as of Sep 30, 2017). The fund has returned 27.7% in a year and 33.8% year to date (as of Oct 27, 2017).

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