South Korea ETF Showdown

With over $4.3 billion in assets under management, the iShares MSCI South Korea Capped ETF (EWY) is the undisputed sheriff in the sparsely populated town of South Korea ETFs.

Few rivals have mounted legitimate challenges to EWY, but a new South Korea ETF has the potential to make a run to “deputy” status. That ETF is the newly minted WisdomTree Korea Hedged Equity Fund (DXKW) , also known as the first ETF to offer hedged currency exposure to Asia’s fourth-largest economy. DXKW debuted on Nov. 7. [South Korea the Hedged Currency Way

“ Although both ETFs essentially hold the same names, DXKW is better diversified. For example, both funds are very heavily weighted toward Samsung Electronics, but the overweighting is more pronounced in EWY, where fully 22% of the ETF is invested in Samsung Electronics. DXKW has 9.5% invested in Samsung Electronics and another 6% invested in Samsung SDI,” writes Charles Sizemore of The Sizemore Letter.

While there are similarities in terms of holdings and the expense ratios on the two ETFs are separated by a mere three basis points (DXKW is lower), the potential advantage provide by DXKW’s won hedge cannot be overlooked.

Like Japan, South Korea is highly dependent on exports, particularly automobiles and electronics. And like Japan, a strong currency can be problematic for South Korean stocks. With room for the Bank of Korea to defend its exporters by lowering rates to weaken the won, this year’s lesson in Japan ETFs is worth remembering.

That being the currency hedged WisdomTree Japan Hedged Equity Fund (DXJ) is up 29.2% while the db X-trackers MSCI Japan Hedged Equity Fund (DBJP) has gained 29%. The unhedged iShares MSCI Japan ETF (EWJ) is higher by 20.7%. [More to Come for Yen Hedged ETFs]

“The won has added volatility to the Korean market for U.S. and other foreign investors. The currency lost 54% of its value during the Asian financial crisis of 1998, and it lost 41% during the 2008 global crisis. So, unless you’re particularly bearish on the dollar (or bullish on the won), there is a case to be made for hedging,” adds Sizemore.

DXKW is worth monitoring because despite the strong won/weak yen scenario, South Korean shares have been solid performers in recent months. In the past three months, EWY has jumped 12.5% as investors have been lured to South Korea due to low volatility compared to other emerging markets and cheap valuations.

iShares MSCI Capped South Korea ETF

Tom Lydon’s clients own shares of DXJ.