The iShares MSCI South Korea Capped ETF (EWY) is up about 1.7% in the past month. That may not sound like much, but it qualifies as a decent performance as far as emerging markets ETFs go these days.
Next to any number of well-known ETFs tracking other emerging Asian economies such as Indonesia, Malaysia and Thailand, EWY looks all the more impressive. A plunging currency has ushered Indonesia ETFs into bear markets while a new recession has done the same for the iShares MSCI Thailand Capped ETF (THD) . [Enigmatic Indonesia: No Emerging Markets Refuge]
EWY has also found firm footing in recent weeks despite increased speculation about when the Federal Reserve will finally taper its bond-buying program. Fed tapering was previously identified by the Bank of Korea, the country’s central bank, as one of the preeminent risks to Asia’s fourth-largest economy.
“In case the reduction or the end of the U.S. quantitative easing is made visible, negative effects will not be small on international financial markets and emerging market economies as well as our economy,” said BoK in June. [Finally Some Relief For South Korea ETFs]
EWY has perhaps gotten a modest boost from investors looking to stay engaged in emerging markets while using an ETF that is perceived to be conservative relative to BRIC funds or ETFs that offer exposure to Southeast Asian nations. The more tangible catalyst for EWY’s decent performance as of late has been a stronger Japanese yen.
Along with Fed tapering, BoK also mentioned the weak yen as a significant threat to the South Korean economy. The trend was undeniable earlier this year. As the yen tumbled and Japan ETFs soared, EWY sank. From its January peak at $65 to its June trough, EWY fell more than 20%, putting it into a bear market of its own. [No Surprises For What Ails South Korea ETF]
However, the yen has bounced back as traders have looked for safe-haven alternatives to the U.S. dollar. It is not a coincidence that as EWY has traded higher over the past month, the CurrencyShares Japanese Yen Trust (FXY) has gained more than 3%.
The Bank of Japan has few options left to weaken the yen in the near-term and if forex markets continue to price in upside for the Japanese currency, export-dependent South Korea and EWY, an ETF that reflects the country’s sensitivity to exports and yen price action, should benefit.
iShares MSCI South Korea Capped ETF
ETF Trends editorial team contributed to this post.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.