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South Korea ETF Surges on Solid Economic Data

Eric Dutram

Emerging market investing has been extremely rocky for much of 2013, as a host of countries face instability, growth concerns, or weak currencies. As a result, investors have been laser focused on the U.S. market as the American economy continues to see strong data in a number of important sectors.

The data readings have been so strong that the Federal Reserve is now thinking of tapering its bond purchases sooner rather than later. However, this has only exacerbated the situation in emerging markets, sending the dollar to new heights, and developing nation demand to fresh lows (See 4 ETFs on the Move After Bernanke Press Conference).

While this trend has been especially apparent in large, poorer nations like China or India, year-to-date, Korea has actually been the worst performer of the group. This is because the country not only struggles along with other emerging markets, but it faces geopolitical risk from its neighbor to the north, and its currency (the won) has tumbled against the dollar in 2013.

The nation is also facing some competitive pressures from Japan as well. That is because Japan has embarked on a historic easing campaign of its own, making it very difficult for South Korean exporters to compete in some key markets (see Three Country ETFs Struggling in 2013).

Clearly, the trend isn’t exactly great for South Korea, and with a volatile North Korea at its doorstep, uncertainty is always around the corner for the nation. However, even with all these issues, events might finally be looking up for Korea, as evidenced by some recent data reports from the nation.

GDP looking up in Korea

South Korea’s latest GDP forecast was bumped up from 2.3% to 2.7%, marking a reversal from the previous cut in December. The key reason for the increase was stronger prospects for exports, a key component of the Korean economy as these account for over half the national output.

Further to this end, the Bank of Korea also reported that exports rose at an annual rate of 7.4% for May, suggesting that the recent rate cut—which helped to drive the won lower—is paying off in terms of competitiveness. In fact, since much of Korea’s imports are from commodities—and these are seeing weakness- the nation is projected to have a record current account surplus this year of roughly $60 billion or 5% of GDP.

So it is pretty clear that even with some of the many woes afflicting the nation, the future is looking bright for Korea. The country is able to stave off Japanese competition, while its status as a net exporter of in-demand products could help the nation avoid the worst of the slump that is hitting many of its less-developed peers in the region (see Korea ETF: Back on Track After Rate Cut?).

Given this trend, some intrepid investors may want to consider jumping into the well-positioned Korea at this time. While there are few stocks from the country that trade in the U.S., there is also a solid ETF that could offer up diversified exposure, which we have highlighted in greater detail below:

iShares MSCI South Korea Capped ETF (EWY)

This is easily the most popular Korean ETF on the market, with just under $3 billion in assets, and 2.2 million shares in average daily volume. The fund is a bit pricey though, coming in at 60 basis points a year in fees.

The ETF holds about 100 stocks in its basket, using a cap weighted approach to allocate assets. Thanks to this, technology takes the top spot at over 30% of assets, followed by consumer discretionary at about 20%, and then financials at 15%. Furthermore, it is worth noting that Samsung makes up close to 21% alone, suggesting a heavy concentration in the electronics giant.

The fund was up significantly on the bout of good news, surging by 3.4% on the day. This helps to reverse the longer term trend in the ETF, as it has fallen by about 17% in the past six months, and double digits in the last 90 days (read Two Hedged ETFs Built for Rocky Markets).

Bottom Line

It has been very difficult to feel good about the Korean market so far in 2013. Broad emerging market worries, concerns over North Korea, and a sluggish currency have all conspired to push the Korean ETF down to start the year.

However, there may finally be some good news trickling into the space, as evidenced by a strong GDP and export data release. This could signal that we are near the bottom for the Korean ETF and that volatility-tolerant investors may want to consider giving this segment a closer look, should these positive trends continue for this important Asian market.

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