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Samsung And The North: Just Two of The Issues Plaguing South Korea ETFs

by
August 24, 2015 11:59 am
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At this writing Sunday night U.S. time, Asia's Monday session is a bloodbath and normally docile South Korean stocks are not immune to that trend. South Korea's benchmark KOSPI is off almost 3.7 percent and earlier in the session touched a 52- week low.

This is not a one-day bout of weakness for South Korean equities. Stocks in Asia's fourth-largest economy have been punished in recent weeks as shares of Samsung Electronic Co. have flailed and tensions with North Korea have escalated, among other factors. The Horizons Korea KOSPI 200 ETF (NYSE: HKOR), a KOSPI tracking ETF trading in New York, has plunged 13.8 percent over the past month.

The iShares MSCI South Korea Capped ETF (NYSE: EWY), the largest U.S.-listed South Korea, is off 12.3 percent over the same period. EWY has also tumbled nearly 31 percent from its May high of just under $66. That drop is equivalent to a bear market defined by a drop of 20 percent and a correction defined by a decline of 10 percent.

So it is not surprising that investors are departing South Korea ETFs at a rapid clip.

Traders pulled $195.4 million from EWY during the week ended Aug. 21, but short sellers are piling into the ETF as 2.2 percent of EWY's shares outstanding were sold short as of Aug. 20, according to Bloomberg.

EWY had $3.19 billion in assets under management and 68.5 million shares outstanding as of Aug. 21, according to iShares data.

Rising short bets against EWY come as Samsung is seeing its smartphone market share erode at the high end due to competition from Apple Inc. (NASDAQ: AAPL) and at the low end at the hands of low-cost products from rival Chinese manufacturers. As South Korea's largest company by market value, Samsung is the largest KOSPI component.

It is also EWY's largest holding at 20.1 percent of the ETF's weight, more than five times the weight given to the fund's second-largest holding, Hyundai Motor.

South Korean stock and ETFs have also been plagued by geopolitical unrest caused by saber-rattling from neighboring North Korea.

Earlier today, South Korean President Park Geun-hye said her country's anti-North Korea broadcasts will continue until the North accepts responsibility for a recent landmine accident earlier this month in the Demilitarised Zone (DMZ) between the two nations that wounded two South Korean troops, reports Reuters.

Down more than 17 percent year-to-date, EWY has bled almost $349 million in assets. The ETF's slide is perhaps vexing to investors that have previously viewed South Korea as one of the least volatile emerging markets and one that is often less volatile than major emerging markets benchmarks.

However, the recent uptick in volatility has EWY sporting a three-year standard deviation of almost 14.7 percent, or more than 140 basis points above the comparable metric on the MSCI Emerging Markets Index, according to iShares data.

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