No Surprises for What Ails South Korea ETF

ETF Trends

Over the past month, finding an ETF that tracks an emerging Asian nation that has not ripped investors’ hearts out is tricky. One might think the iShares MSCI South Korea Capped Index Fund (EWY) , one of the least volatile single-country emerging markets ETFs on the market, would be a good place to start to find some positivity among Asian ETFs.

It depends on one’s definition of “positive.” EWY is off 6.8% in the past month. That sounds good, sort of, compared to the comparable Philippines and Thailand ETF, but the South Korea has not been an Asian darling, either. At best, EWY is the fourth-best Asia single-country ETF over the past month, trailing the iShares MSCI Taiwan Index Fund (EWT) , the iShares MSCI Malaysia Index Fund (EWM) and, if you can believe it, the Market Vectors Vietnam ETF (VNM) . [Overseas ETFs With Good Value]

Put another way, EWY has not been all that good over the last month, or this year for that matter as the ETF is down 16.6% year-to-date. Over the past four weeks, the fund has merely been less bad than some of the more volatile Asia ETFs and less bad is not good enough to get the job done for investors.

Making South Korean stocks riskier in the current environment is that the assets class is being attacked from multiple angles. First, South Korean stocks and EWY are showing exaggerated correlation to the Japanese yen. The falling yen is, of course, good for Japanese stocks, and while the CurrencyShares Japanese Yen Trust (FXY) is 7.7% year-to-date, EWY’s performance is more than twice as worse.

Second, investors have become skittish about emerging markets due to the possible winding down or end of the Federal Reserve’s quantitative easing program. In a report issued Monday to policymakers, the Bank of Korea cited the falling yen and the possibility of an early end to QE by the Fed as the biggest risks facing the South Korean economy, according to Xinhua.

“”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, according to Xinhua.

South Korea’s economy, Asia’s fourth-largest, is heavily reliant on exports, which make up almost 50% of GDP. In recent months, Japan’s aggressive monetary policy has greatly depreciated the Japanese yen, increasing Japanese exporters’ competitiveness on the global market. EWY’s weakness has continued despite BoK last month lowering interest rates to 2.25% from 2.5%, its first cut in seven months. [South Korea ETF Lower After Rate Cut]

At the time, the central bank cited slack growth in China, faltering growth in Europe and falling consumer price inflation. Combine those factors with the weak yen and possible end of QE, and there are at least five macro scenarios pressuring South Korean stocks. That is five too many and too many to expect that EWY will be anything more than “less bad” in the near-term.

iShares MSCI South Korea Capped Index Fund

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ETF Trends editorial team contributed to this article.


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.

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