South Korea ETFs: Gems In Tumultuous Times

There is still some debate regarding whether South Korea is an emerging market. For example, the Vanguard FTSE Emerging Markets ETF VWO, the largest emerging markets exchange traded fund, does not include South Korean stocks, but other major index providers and ETF issuers view the country as “developing.”

Though South Korea is still emerging in the eyes of some market participants, there is no denying the country's equity markets have been significantly less bad this year than other emerging markets. The iShares MSCI South Korea Capped ETF EWY is down just 2.3 percent year-to-date compared to an 8.7 percent loss for the MSCI Emerging Markets Index. South Korea is the second-largest country weight in the MSCI Emerging Markets Index at 15.6 percent.

Currency hedged South Korea ETFs have performed even better. The WisdomTree Korea Hedged Equity Fund DXKW and the Deutsche X-trackers MSCI South Korea Hedged Equity ETF DBKO are down an average of just 0.8 percent year-to-date. 

South Korea has some advantages, including a highly advanced economy, Asia's fourth-largest; a low debt-to-GDP ratio and an accomodative central bank.

“As recently as mid-September, Standard & Poor’s (S&P) upgraded Korea’s credit rating to AA-, the highest level in nearly 18 years. It said Korea is likely to maintain economic growth higher than most developed economies over the next three to five years. S&P is further encouraged by the decline in external debt owed by Korean banks and reduced short-term borrowing in total external debt,” said WisdomTree in a recent research note. 

Last week, the Bank of Korea (BoK) kept interest rates at 1.5 percent, but the central bank has slashed benchmark borrowing costs there by 50 percent over the past three years in effort to defend South Korean exporters against the weak yen. BoK's previously revealed willingness to attempt to weaken the won could bode well for ETFs such as DXKW going forward.

Consumer discretionary and technology, two export-heavy sectors, combine for nearly 51 percent of DXKW's weight. Additionally, South Korea is a net commodities importer, meaning it benefits from low oil prices, among other slumping commodities prices.

While the EM region remains a tricky landscape to navigate, we believe it is important to be able to concentrate on areas in EM where both cyclical and structural factors align to support equities and currencies. Korea makes for an interesting market that stands out for its performance in 2015, relative low cost to hedge against currency weakness and fairly wide spreads for earnings yields compared to bond yields,” said WisdomTree.