One ETF That is Glad This Week is Over
With less than two hours left in Friday’s session, the iShares MSCI South Korea Capped Index Fund (NYSE: EWY) easily fits the bill as one ETF that, if ETFs could sport human emotions, is glad this week is drawing to a close.
EWY, one of the largest country-specific emerging markets with over $3.1 billion in assets under management, is on pace to finish the week down 6.3 percent. To be sure, it has been a case of “pick your poison” with EWY this week.
The largest South Korea ETF has come under heavy selling pressure amid intensifying threats from North Korea. In recent days, North Korea has not been shy with its rhetoric regarding possible military aggression towards South Korea and the U.S.
Investors in South Korean stocks and ETFs have been down this road before, but it is fair to say North Korea’s sharp tongue is rarely good news for EWY. Arguably a more plausible explanation for EWY’s ills is the weaker Japanese yen.
EWY’s vulnerability at the hands of a weaker yen was highlighted two months ago, but with the Bank of Japan unveiling more aggressive stimulus measures on Thursday, investors are once again reminded about this ETF’s vulnerability to a plunging yen.
While talk of South Korean equities being hampered by the weaker yen has increased in recent days, this scenario is nothing new and has been playing out for all of 2013. The yen is the worst-performing developed market currency in the world this year and that is just how Japanese Prime Minister Shinzo Abe wants it.
Including today’s loss, the CurrencyShares Japanese Yen Trust (NYSE: FXY) is down about 11 percent year-to-date. EWY has actually overshot that loss with a year-to-date retrenchment of nearly 15 percent. Said another way, EWY is displaying an intimate negative correlation to the ProShares UltraShort Yen (NYSE: YCS), which has surged more than 22 percent this year.
EWY is not the only ETF being hit by weakness in South Korean stocks. The country is still classified as an emerging market by some index providers and has a significant presence in some of the largest diversified emerging markets ETFs. For example, South Korea has a weight of 14.5 percent in the iShares MSCI Emerging Markets Index Fund (NYSE: EEM). EEM is off more than three percent this week and more than eight percent this year.
Other ETFs being hindered by the plummeting yen include the $243.6 million iShares S&P Asia 50 Index Fund (NYSE: AIA), which features an almost 28 percent weight to South Korea. Samsung is that ETF’s largest holding with a weight that is more than double the second-largest holding (14.3 percent compared to 5.88 percent. AIA, which has been hit by its significant China exposure, is off nearly six percent this week.
The $2.68 billion iShares MSCI All Country Asia ex Japan Index Fund (NASDAQ: AAXJ) features a 19.1 percent allocation to South Korea and that has been enough to drag the ETF down more than three percent this week.
Investors looking to dodge South Korea with diversified emerging markets ETFs can consider the Vanguard FTSE Emerging Markets ETF (NYSE: VWO), which is in the process of paring its exposure to the country, and the PowerShares S&P Emerging Markets Low Volatility Portfolio (NYSE: EELV). EELV features a mere 6.5 percent weight to South Korea making it the ETF’s fifth-largest country weight well behind Malaysia, South Africa, Taiwan and Chile.
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