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ETFs to Watch as South Korea GDP Bounces Back

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South Korea’s economy expanded in the first quarter, as exports of memory chips grew and the economy received a boost from higher government spending and investments.

Into the Headlines

South Korea’s GDP increased 1.1% sequentially in the January-March quarter against a 0.2% contraction in the previous period and above 1% increase forecast by Reuters, per the Bank of Korea. GDP grew 2.8% year over year, same as in the previous period.

Exports grew 4.4% in the quarter against a decline of 5.3% in the prior period. This was primarily due to strong shipments of memory chips. However, private consumption grew a mere 0.6% compared with 1% in the prior quarter. “Exports will continue to lead growth. An increase in the minimum wage will kick in slowly and we could probably see household spending picking up in the second half,” per a Reuters article citing Park Chong-hoon, an economist at Standard Chartered Bank of Korea.

Coming to government spending, higher spending on healthcare led to growth in this sector. It increased 2.5% sequentially, the fastest quarterly gain in six years. “The expanded medical benefits boosted government spending, while surging shipments of memory chips are still supporting exports,” per a Reuters article, citing a statement by a Bank of Korea official.

Moving on to monetary policy, South Korea’s central bank raised interest rates for the first time in more than six years in November 2017. The Monetary Policy Board decided to increase the benchmark interest rate by 25 basis points to 1.5% from a historic low of 1.25%. The central bank of South Korea faced increased pressure to hike rates after the Federal Reserve went on a policy-tightening mode. However, following a GDP decline in the previous quarter and still low inflation, policymakers are cautious about their interest rate decisions.

Global Factors at Play

The South Korean economy may be subject to a variety of other risks. Although tensions relating to North Korea seem to be ebbing, latest fears of a trade war between the United States and China have once again brought investors to the edge of their seats. Experts believe closed-door negotiations to solve any possible conflict relating to trade talks, however, markets have a cautious stance to safeguard themselves from any adverse event (read: How is the Current Trade Scenario Impacting Asia ETFs?).

Adding to the agony, being a net oil importer, risks of rising oil prices might pose risks to the economy. WTI crude prices are breaking records. Increased geopolitical tensions seem to be the driving force for the increase. Reports of Iranian-backed Houthis in Yemen firing missiles on Saudi Arabia led to increased unrest in the region and stoked fears of supply disruption (read: Why to Consider Leveraged Oil ETFs Now).

Let us now discuss a couple of ETFs providing exposure to South Korea (see all Asia-Pacific (Developed) ETFs here).

iShares MSCI South Korea Capped ETF EWY

This fund is the most popular in the space offering exposure to South Korean equities.

It has AUM of $4.2 billion and charges 62 basis points in fees per year. From a sector look, Information Technology, Financials and Consumer Discretionary take the top three spots, with a 37.2%, 13.6% and 12.1% allocation, respectively. Samsung Electronics Ltd, Sk Hynix Inc and Posco are the top three stocks with 23.4%, 5.4%, and 3.0% allocation, respectively. The fund has returned 21.1% in a year. It has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.

AdvisorShares KIM Korea Equity ETF KOR

This fund seeks to offer exposure to South Korean growth equities in the mid-to-large cap segment.

It has AUM of $10.6 million and is relatively expensive as it charges 99 basis points in fees per year. From a sector look, Information Technology, Consumer Discretionary and Industrials take the top three spots, with 32.0%, 17.0% and 16.0% allocation, respectively. Samsung Electronics Co Ltd, NAVER Corp and SK Hynix Inc are the top three stocks with 18.7%, 3.8% and 3.5% allocation, respectively. The fund has returned 12.0% in a year.

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