The iShares MSCI South Korea Capped ETF (EWY) gained about three-quarters of a percent last week, but stocks in Asia's fourth-largest economy could be challenged by changes to the country's capital gains taxes.
Under a draft plan, some foreign investors would face capital gains taxes if they hold as little as 5 percent of a South Korean company’s stock, a big change from the current 25 percent threshold. This would cover investors from nations that South Korea doesn’t have a tax treaty with, which include Hong Kong, Singapore, Luxembourg and the Cayman Islands, according to Bloomberg.
EWY, which tracks the MSCI Korea 25/50 Index, holds 114 stocks. The $4.3 billion fund is one of the oldest and largest emerging markets single-country exchange traded funds. Last year, investors added $192.3 million to EWY.
EWY has a three-year standard deviation of just over 17%, which is low compared to many other single-country emerging markets funds. That historical lack of volatility is one reason why EWY is a favorite among investors.
“This proposal, if implemented as presented, could potentially have negative impacts on Korean equity market accessibility and hence, the replicability of the MSCI Korea Indexes and the MSCI Emerging Markets Index,” New York-based MSCI said in a statement Friday.
Other South Korea ETFs include the Deutsche X-trackers MSCI South Korea Hedged Equity ETF (NYSEARCA: DBKO).
DBKO “seeks investment results that correspond generally to the performance, before fees and expenses, of the MSCI Korea 25/50 US Dollar Hedged Index. The index is designed to provide exposure to South Korean equity markets, while at the same time mitigating exposure to fluctuations between the value of the U.S. dollar and the South Korean won,” according to Deutsche Asset Management.
EWY allocates over 36% of its weight to technology stocks, an allocation that is more than double its second-largest sector weight. Financial services and consumer discretionary names combine for about 27% of the ETF's weight.
For more information on the South Korean markets, visit our South Korea category.