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A Scintillating South Korea ETF

May 11, 2017 10:49 am
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A Scintillating South Korea ETF

With all the attention being paid the recent election in France, it is somewhat understandable that South Korea's own national election went overlooked by U.S. investors. What shouldn’t be overlooked is the fact that South Korean stocks are on a scorching pace and the iShares MSCI South Korea Capped ETF (NYSE:EWY) is up about 23 percent year-to-date.

EWY, In Focus

EWY, the largest U.S.-listed exchange-traded fund dedicated to South Korean equities, has long been a favorite among investors seeking single-country exposure via ETFs. The $3.3 billion EWY celebrated its 17th birthday earlier this week, making it one of the oldest and largest single-country emerging markets ETFs trading in the U.S.

Political Influences Strike Again

South Korea, Asia's fourth-largest economy and one of the most advanced emerging markets, is undergoing its own version of political change after controversy under the previous regime.

“The election of Moon Jae-In over the conservative Hong Joon-Pyo by a serious margin, ushers in a new era for South Korean politics after nearly a decade of conservative rule,” said BlackRock. “The impeachment scandal that has gripped the nation has turned focus to trust in the political system and anti-corruption at the center of the campaigns.”

EWY holds over 100 stocks and is a departure from many single-country emerging markets ETFs in that its largest sector weight is not financial services. Rather, EWY is the “Samsung ETF” with a 24.3 percent weight to conglomerate Samsung Electronic (OTC:SSNLF) and a weight of more than 38 percent to technology stocks. That is more than double the ETF's financial services allocation, EWY's second-largest sector weight.

The new administration is left-leaning, though believed to be market-friendly.

“Though left-leaning in stance, Moon has stated no intentions to raise taxes, and pledged more government spending. This together with the unanimity of the vote has lowered uncertainty and boosted risk assets in the region,” said BlackRock. “The won is one of the best performing major currencies this year, up 7 percent YTD, while the benchmark KOSPI is up 20 percent, making it also one of the best global indices.”

Investors are missing out on EWY's rally. The ETF has suffered year-to-date outflows of $160 million. Over the past year, EWY is up 32.4 percent, but has lost $844 million in assets.

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