U.S. Markets closed

Muted Reaction to Rate Cut for South Korea Hedged ETFs


The Bank of Korea, South Korea’s central bank, joined the spate of global central banks lowering interest rates when pared borrowing costs to a record low of 1.75% earlier Thursday.

In becoming at least the 24 th central bank to lower rates this year, and one of a growing number of emerging markets central banks to do so, Bank of Korea surprised economists as just two of 17 surveyed by Bloomberg forecast a rate cut.

Currency hedged South Korea exchange traded funds are experiencing mixed reactions to BOK’s surprise rate cut. For example, the Deutsche X-trackers MSCI South Korea Hedged Equity ETF (DBKO) is trading slightly lower today though volume in that ETF is more than seven times the daily average. On light volume, DBKO’s rival, the WisdomTree Korea Hedged Equity Fund (DXKW) , is trading modestly higher. [Put South Korea ETFs on Your 2015 Lists]

As has been seen across the currency hedged ETF landscape this year, South Korea hedged ETFs are easily topping their non-hedged peers as the U.S. dollar strengthens. Entering Thursday, South Korea’s won was down 3.5% this year against the greenback, helping DBKO and DXKW to year-to-date gains of 2.8% and 7.5%, respectively, while the iShares MSCI South Korea Capped ETF (EWY) is up just 0.8%.

DXKW is the older of the two South Korea hedged ETFs with a November 2013 debut date. DBKO, which debuted in January 2014, is the larger of the pair with $64.1 million. Combined, the two ETFs have just under $84 million in assets under management, but there are catalysts in place that could give tactical investors reasons to consider currency hedged exposure to Asia’s fourth-largest economy.

First, investors are starting to embrace non-Japan currency hedged single-country ETFs, though those affections have been limited to Germany funds, including products from Deutsche Asset & Wealth Management and WisdomTree. Year-to-date, the three U.S-listed euro hedged Germany ETFs have added over $1 billion in new assets combined, indicating investors are warming to non-Japan single-country currency hedged ETFs. [Mad Dash to Germany Hedged ETFs]

Second, BOK has room to further lower rates. The central bank has lowered rates by 75 basis points over the past 22 months and with the Bank of Japan committed to rampant monetary easing and a weak yen, BOK must defend South Korean exporters with its own accommodative monetary policy.

Emerging markets central banks have been among the most dedicated cutters of interest rates this year. The Bank of Thailand did so earlier this week. Prior to that, China and India lowered rates. Russia did so in January and some traders are betting another are cut from the controversial country is imminent. Indonesia and Turkey have also lowered rates.

WisdomTree Korea Hedged Equity Fund