The South Korea Connection: The Impact on ETFs

ETF Trends

It was October 2012 when Vanguard, the third-largest U.S. ETF issuer, shook the ETF world when it announced it would move some of its popular funds away from MSCI (MSCI) indices to FTSE indices.

The largest of the affected funds was the Vanguard FTSE Emerging Markets (VWO) , still the largest emerging markets ETF by assets despite heavy outflows over the past year. The big news in VWO’s index switch was that South Korea would no longer be part of that ETF’s lineup. FTSE classifies the market as developed, MSCI sees it as emerging.

VWO began life with no South Korea exposure in late June. Call it July 1 and nearly seven months have passed since Asia’s fourth-largest economy ceased to be a member of VWO’s lineup. [No More South Korea in VWO]

Seven months may not be the type of data set manly analysts and researchers would rely, but it does paint a picture of the differences between VWO and its chief rival, the iShares MSCI Emerging Markets ETF (EEM) .

Remember that South Korean stocks struggled through the first half of 2013 on fears of Federal Reserve tapering and the impact of the weak yen on South Korean exporters. That scenario reversed in the second half as investors poured billions into South Korean shares amid compelling valuations and the market’s status as one of least volatile in the emerging world. [Bull Case for South Korea ETFs]

Advantage: EEM. From July 1, 2013 through the end of the year, the iShares MSCI South Korea Capped ETF (EWY) surged almost 22%, helping spark EEM and the iShares Core MSCI Emerging Markets ETF (IEMG) to gains there were nearly 200 basis points better than what VWO posted over the same time.

Of course, these scenarios have a tendency to flip and that is what has happened this year. Much to the dismay of investors thinking of South Korea as a refuge, EWY ranks as one of the 10 worst non-leveraged ETFs to start 2014. [Conservative Emerging Markets Little Help to Investors]

That means a slight advantage to VWO, which has been slightly less bad than EEM and IEMG year-to-date.

Still, investors eager to get out of emerging markets ETFs this year are not grousing over which fund has South Korea exposure and which one does not. After ranking among the 10 worst offenders in terms of 2013 outflows, EEM and VWO are in the top-three this year.

Vanguard Emerging Markets ETF

View photo

.

VWO

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of EEM.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. 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.

Rates

View Comments (0)