South Korea ETFs the Hedged Currency Way

Imagine being able to access an exchange traded fund or multiple ETFs that provide access to the equities of a large, advanced, export-driven Asian economy with currency hedge kicker.

Investors already have three such options Japan ETFs. The new WisdomTree Korea Hedged Equity Fund (DXKW) gives investors the first hedged currency play on South Korea, Asia’s fourth-largest economy. DXKW debuted Thursday, becoming WisdomTree’s (WETF) sixth hedged currency ETF. [A Look at the South Korea Hedged Equity Index]

DXKW tracks the WisdomTree Korea Hedged Equity Growth Index, which “is designed to provide exposure to Korean equity markets while at the same time neutralizing exposure to fluctuations of the Korean Won movements relative to the U.S. dollar,” according to WisdomTree.

The new ETF charges 0.48% per year, less than the 0.61% charged by the iShares MSCI South Korea Capped ETF (EWY) , by far the largest South Korea ETF. [A New Spin on South Korea ETFs]

For those familiar with investing in South Korea, the hedge currency idea makes sense. While the economy there is smaller than Japan’s, it is similar in that South Korea is also a major exporter of automobiles and electronics, among other goods. Just as Honda (HMC) and Toyota (TM) can be harmed by a strong yen, a rising won can be a detriment to the likes of Samsung Electronics, Samsung SDI, Hyundai Motors, Kia Motors, LG and KT&G.

Those stocks combine for over 30% of DXKW’s weight. DXKW provides exposure to six sectors with industrials and materials combining for 47.4%. Consumer discretionary and tech combine for over 39%.

The debut of DXKW is arguably well-time as South Korean banker s and policymakers have said this year that the weak yen is one of the two biggest headwinds facing the economy there.

“Korea’s exports share a high degree of overlap with Japan’s. Korea is arguably the country that would be most impacted by Shinzo Abe’s programs to stimulate Japan’s economy, which have resulted in a weaker yen. If the yen continues to weaken considerably, Korea may have to counteract these measures, in which case a currency-hedged option could become more important for Korean equities,” said WisdomTree Research Director Jeremy Schwartz in a note.

In addition to the won hedge, DXKW focuses on companies that derive less than 80% of their sales from inside of South Korea. There is a 10% cap to any individual security, and a 4.5% cap to the second-largest individual security at the time of the annual Index rebalance,” according to WisdomTree.

DXKW Sector Allocations

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.