Following the incredible success that WisdomTree saw with its hedged Japan ETF (DXJ), the company has gone on a massive campaign to launch more of these hedged products onto the market. This trend continued earlier in the year with another Japan fund and then several European focused ones, and now it is back to Asia once more for a Korea-hedged product.
This latest fund, the Korea Hedged Equity ETF—DXKW, looks to take out the won for U.S. based investors, allowing Americans to buy Korean securities without worrying about currency risks. This new approach to the Korean market could be intriguing for some, and we have highlighted a few of the key details regarding this product for interested investors below:
DXKW in Focus
The new ETF looks to follow the WisdomTree Korea Hedged Equity Index, a benchmark of equity securities in Korea. The fund looks to charge investors 58 basis points a year in fees for this exposure, and hold roughly 50 companies in its portfolio (read Emerging Market ETFs: How to Pick Winners).
In terms of sectors, capital goods take the top spot at roughly 22.2% of the portfolio, though they are closely trailed by materials (21.7%), and automotive (20.7%). Top companies in the basket include Samsung Electronics (9.5%), Samsung SDI (6%), and Hyundai Motor (5.7%).
Investors should also note that no single stock can make up more than 10% of the portfolio, while securities are weighted based on their total net income. Additionally, the fund focuses on companies that derive less than 80% of their revenues from South Korea, in order to make sure that exporters take a prime position in the portfolio.
Why hedge out the currency?
Korea represents an interesting nation to try out another hedged currency strategy on, thanks to the massive currency weakening campaign going on in the nation’s main rival, Japan. Since many Japanese companies compete with Korean firms in key export markets, a weakened yen has given Japanese firms a decided advantage over their Korean counterparts.
Thanks to this, there is some speculation that Korea will embark on an easing campaign of its own in order to level the playing field with Japan. This means that those invested in Korean securities could be hurt as the won slides relative to foreign currencies, suggesting that a hedged play could be the way to go in this environment (see WisdomTree Launches Germany Hedged Equity ETF).
Furthermore, the Korean currency has been prone to big moves in the past, so it could reduce volatility to take out this currency exposure. For example, according to a WisdomTree fact sheet, in the past 20 years there were two periods in which the won lost more than 40% of its value against the dollar, while the currency has added roughly 12% in volatility per year over the past 5 years to the local equity market index. So clearly, taking this out can help to smooth out longer term returns for investors, and especially for those who are dollar-focused.
How does it fit in a portfolio?
The fund seems like a solid choice for investors who want broad exposure to the South Korean market at a relatively cheap rate. It could also be great for those who believe that Korea will see a sharply weaker currency, but that it will be a solid investment otherwise (see 4 Unbeatable ETF Strategies for Q4).
The fund may not be appropriate for investors who believe that the won will be strengthening against the dollar, as DXKW looks likely to underperform in this situation. Additionally, volume might be a little light in the beginning, much like we saw with DXJ before its surge in popularity, or in many of the other newly-launched funds too, so traders should keep that in mind as well.
ETF Competition and Bottom Line
Despite being a relatively large market, the South Korean ETF landscape is pretty sparse. There are only two other ETFs currently in the space, and both have higher expense ratios than the just launched DXKW.
First is the relatively unknown First Trust South Korea AlphaDEX Fund (FKO) which has less than $10 million in assets, and charges a somewhat steep 80 basis points a year in fees. However, its ‘AlphaDEX’ methodology may provide investors with better picks, and certainly could produce a more spread out basket of securities for investors (read The Key to International ETF Investing).
The dominant force in the market is the iShares MSCI South Korea Capped ETF (EWY), which has over $4 billion in assets under management. The fund sees a great deal of volume and has a decent expense ratio at 62 basis points a year, though its portfolio is a little concentrated in the top names.
Given the total dominance of EWY in the Korea market, and the apparent lack of interest in the country by investors (at least when compared to other Asian markets), it could be difficult for DXKW to build up assets.
However, since it is actually the cheapest fund in the space, it could become a favorite for those seeking exposure to the nation, especially if the won hits some turbulence against the dollar, making a hedged pick the way to go for Korea ETF exposure.
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