ETFs
tracking South Korean equities are defying logic these days. With
the Vanguard MSCI Emerging Markets ETF (NYSE:
VWO
), the largest emerging markets ETF by assets, poised to drop the
MSCI Emerging Markets Index next year in favor of the FTSE Group
equivalent, some analysts and investors expected a sell-off in
South Korean stocks.
The reason being because the FTSE Emerging Markets Index does
include South Korea as a developing nation. That means Vanguard,
the third-largest U.S. ETF sponsor, will have to dump South
Korean equities as VWO transitions to the FTSE index. As of the
end of October,
South Korea accounted for 15.3 percent of VWO's
weight
.
VWO currently holds shares of industrial conglomerate Samsung,
the fund's largest holding, automakers Hyundai and Kia and
steelmaker Posco (NYSE:
PKX
) among other South Korean stocks.
Despite assurances from Vanguard that its index transition
will be efficient, gradual and orderly, there has been ample
speculation South Korean stocks will come under
pressure
due to the switch.
That is not happening. At least not yet. It is not
unreasonable to say nearly everyone that follows ETFs and nearly
everyone that follows South Korean stocks knows Vanguard has to
sell Samsung, Kia and friends. Vanguard announced the index
switch on October 2. Since then, the $3 billion iShares MSCI
South Korea Index Fund (NYSE:
EWY
) is fractionally lower.
EWY's loss is nothing to complain when noting the
aforementioned four stocks combine for 34.3 percent of the fund's
weight. All four are found among EWY's top-10 holdings. Alone,
Samsung accounts for 22.2 percent of EWY's weight.
Perhaps even more impressive is the fact that over the past
month, EWY has shown no ill-effects of the Vanguard change as the
ETF has gained 3.1 percent.
EWY is not alone. Unbeknownst to many investors, there is
another South Korea ETF on the market, the First Trust South
Korea AlphaDEX Fund (NYSE:
FKO
). Unlike EWY, the First Trust South Korea AlphaDEX Fund is not
traditional market cap-weighted ETF. Rather, FKO uses growth and
value factors such as sales to price and one year sales growth,
book value to price, cash flow to price and return on assets to
screen for possible constituents.
Not surprisingly, FKO has few stocks than EWY (50 for the
former compared to 107 for the latter). FKO also offers a more
balanced approach as no single name represents more than 4.5
percent of its weight. The first trust offering has also proven
nearly immune to the Vanguard news, rising four percent since
October 2. Like EWY, FKO has also held up nicely over the past
month, gaining 2.9 percent.
At this juncture, it looks like it is safe to say that the
Vanguard-induced buying opportunity in South Korean stocks some
investors were clamoring for in October will not materialize
because, well, Vanguard is not going to induce it.
Nor has Vanguard's index change for VWO lead to upside for
Brazilian and Chinese stocks even though the ETF will have higher
allocations to those nations upon transitioning to the FTSE
Emerging Markets Index. In fact, those are the FTSE's index's two
largest country weights.
Yes, the iShares FTSE China 25 Index Fund (NYSE:
FXI
) is up 5.3 percent since October 2, but that is more
attributable to bullish Chinese economic data than Vanguard
gobbling up Chinese stocks. Conversely, the iShares MSCI Brazil
Index Fund (NYSE:
EWZ
) has slid 5.6 percent over the same period, indicating that
neither Vanguard nor any other fund company have been able to
stem the tide of slumping Brazilian equities amid that country's
slack economic growth.
For more on South Korea and ETFs, click
here
.
(c) 2012 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.