South Korea ETFs Stumble, Betray Conservative Reputation
February 19, 2014

South Korea exchange traded funds are struggling this year, but the country’s slowdown may have less to do with the general risk-off selling in emerging markets and more to do with weaker global growth.

Most South Korean companies are heavily involved in the export industry, selling goods to emerging and developed economies, writes Patricia Oey, senior fund analyst for Morningstar.

While the iShares MSCI South Korea Capped ETF (EWY) rallied in the second half last year on the improving U.S. and Europe outlook, EWY has declined 7.0% year-to-date and erased most of last year’s gains.

Oey argues that the recent weakness in EWY is attributed to selling pressure in its large holding, Samsung, which accounts for about 20% of the ETF’s assets. Samsung Electronics is the largest player in the global smartphone market, and mobile telephone accounts make up 60% of the company’s operating profit.

“Large-cap South Korean firms have demonstrated their might over the past decade,” Oey said. “Many companies, such as Samsung Electronics, Hyundai, and LG have successfully moved up the value chain, increased market share, and now have well-established, globally recognized brand names.”

Looking ahead, the country will benefit from free trade agreements with the U.S. and Eurozone. Additionally, China, South Korea’s fourth largest trading partner, will have an impact on exporters. [The South Korea Connection: The Impact on ETFs]

“We expect economic development in China, as well as in other emerging markets, to be an important driver of growth for many of South Korea’s larger companies over the medium term,” Oey added.

EWY has gotten a modest boost this month, though it is still well off the pace set by more volatile ETFs tracking Indonesia and the Philippines, as just two examples. The ETF is currently testing its 50-day and 200-day exponential moving averages.

iShares MSCI South Korea Capped ETF

For more information on South Korea, visit our South Korea category.

Max Chen contributed to this article.

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.