Economic uncertainty all over the world has taken its toll not
only on the developed equity markets, but has also cast its
shadow over some of the emerging markets as well. Euro zone woes
and the unemployment level in U.S. continue to shake investor
confidence while worries over Chinese growth are also becoming a
Three China ETFs Still Going Strong
With this backdrop, we would like to highlight Asia's fourth
largest economy, South Korea. In the recent global economic
turmoil, the South Korean economy was somewhat less affected by
the uncertainty and is usually regarded as one of the more stable
economies in the region, despite its emerging market status (
South Korea ETF Investing 101
According to the Korean brokerage houses, the South Korean
economy is expected to grow at the rate of
3.2% in 2013
. The country still has plenty of room to grow too, as gross
national income per capita was $20,870 last year, compared with
Japan's $45,180 and Hong Kong's $35,160, according to World Bank
The resilience of this economy even in times of global
financial turmoil may be attributed to the strength of three
world beating Korean companies, namely, Samsung, Hyundai Motor
Co. and its affiliate Kia Motors Corp. While Samsung phones
account for nearly a quarter of the world's mobile phones,
Hyundai and Kia are amongst the top six most profitable
automobile markers (
Forget the BRIC ETFs, Focus on the PICKs
Clearly, export plays a key role in South Korea's economic
structure as half of the economic output is dependent on it.
South Korea exports a major part of its goods to European and
U.S. markets. So, the protracted economic weakness in these two
regions has hurt exports from South Korea due to deflating demand
Are Korean ETFs in Trouble?
The country is nevertheless pursuing certain measures so as to
provide a boost to domestic demand in order to set off the
slowdown of exports to U.S. and European markets.
Also, in an attempt to stimulate growth of the sputtering
economy, the central bank has been continuously decreasing its
interest rate. The Bank of Korea has cut rates twice in a span of
four months. In the most recent announcement, the central bank
has cut the rate to 2.75% from 3%.
Faltering exports and domestic slowdown may somewhat limit
South Korea's economic growth rates. Still, this region remains
an interesting choice for investors when compared to other
This is especially true when investors compare it to other
developed markets which are not seeing such high growth rates,
nor do they have the technological and manufacturing prowess of
Given this, Korean
could be an interesting way to target the market heading into
2013. For investors seeking to delve into this slice of the
market in basket form the following options are
iShares MSCI South Korea Index (
Launched in May 2000, EWY is linked to the MSCI Korea Index.
The Index has been designed to measure the performance of the
broader South Korean equity markets. The index is a float
adjusted, market capitalization weighted index which mostly
consists of publicly traded large cap stocks.
The fund is rich in both volume and asset base. It trades with
an asset base of $2.9 billion and is considered to be one of the
most liquid options available in the space trading with a volume
level of more than 2 million shares a day (
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EWY provides exposure to 107 South Korean securities which
mostly covers the large cap section of the market spectrum. The
fund appears to be quite concentrated in its top 10 holdings as
nearly 50% of the asset base goes towards it. One of the top
mobile makers of the world, Samsung plays a very dominant role in
the fund with 22.3% of the asset base allocated to it.
So the fund's impressive performance last year is largely
driven by Samsung. This is closely followed by other large
companies of the South Korean economy which play a very
influential role in its growth. Hyundai takes a share of 5.6% in
the fund while Posco is allocated 3.7% of the asset base. Kia
takes the fifth position in the fund with an asset allocation of
Among sectors, the fund appears to be highly invested in
information & technology. The fund allocates 32.9% of the
asset base to the sector. Other than this, the fund assigns
double-digit allocation to consumer discretionary, financials,
industrials and materials. Among others, the fund does not invest
more than 5.82%.
The fund's performance in 2011 has been disappointing
delivering a negative return of 11.73%. This is mostly attributed
to weak demand for Korean goods from U.S. and Europe which led to
export shrinkage. However, in the last one year, the fund has
done a good job setting off all the losses of 2011 and delivering
a return of 21.9% (
Inside the Two ETFs up More Than 140% YTD
The fund charges a fee of 59 basis points annually from
investors and has generated a yield of 0.62% in the process.
First Trust South Korea AlphaDEX (
Launched in April 2011, First Trust South Korea AlphaDEX (FKO)
is the latest addition to the family of South Korean ETFs.
FKO is a passively managed ETF designed to track the
performance of the Defined South Korea Index, an index dominated
by the stocks selected on the basis of the AlphaDEX screening
The AlphaDEX methodology for selecting stocks uses both growth
and value factors for determination of the stocks to be included
in the fund. In this way, investors get a blend of both growth
and value stocks in one fund.
Unlike its iShares counterpart, the fund is not popular among
investors as indicated by the trading volume of just 1,300 shares
Guide to the 25 Most Liquid ETFs
). Also, since its inception, the fund has been able to amass an
asset base of $1.3 million, much lower than EWY. So it appears
that EWY dominates investor portfolios when it comes South Korean
The ETF also provides exposure to a very small basket of just
50 stocks. This fund is also inclined towards large caps which
cover 73% of the holding pattern. Among other market spectrum,
the fund has mid caps in its holding and no allocation has been
made to small caps.
The fund appears to be moderately concentrated in the top 10
holdings in which it allocates 36% of the asset base.
Interestingly in this fund, Samsung does not appear to dominate
the holding pattern as it has been allocated the 28
position with just 2.01% of the asset base.
In terms of sector allocation, industrials dominate the
holding pattern with double-digit allocation of 25.9% (
Three Industrial ETFs Outperforming XLI
). Consumer discretionary, consumer staples, financials and
materials also get double-digit allocation in the fund. In the
top 10 holdings, 4 companies are of the industrial sector.
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ISHARS-S KOREA (EWY): ETF Research Reports
FT-S KOREA AD (FKO): ETF Research Reports
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