A South Korea exchange-traded fund (ETF) is comprised of the securities of companies based in South Korea and/or listed on South Korean exchanges. South Korea is one of the famous Four Asian Tigers, along with Hong Kong, Taiwan and Singapore, and it is home to some of the largest industrial and technological firms in the world.
Since the 1960s, very few countries boast as consistent and explosive an economic growth pattern as South Korea. It is the third-largest economy in Southeast Asia, trailing only top-five global economies in Japan and China.
ETFs operate like a hybrid between two other equities: stocks and mutual funds. A South Korea ETF can be just as diversified as a South Korea mutual fund, yet it trades intraday like shares of Korean companies such as Samsung (SSNLF).
Despite its growth and success, South Korea is not the target of many large ETFs. This leaves room for up-and-coming managers to seize on potentially untapped equity returns. On the flip side, it leaves many South Korea ETF plays as niche-only.
iShares MSCI South Korea Capped ETF
Very few funds dominate a single national equity market the way that the iShares MSCI South Korea Capped ETF (EWY) dominates South Korea. EWY is the only sizable ETF built of South Korean equity holdings and the only South Korea ETF with an average daily trading volume in excess of 300,000.
BlackRock launched EWY in 2000 and linked it to the Morgan Stanley Capital International Korea Index. This index is float-adjusted and, like most iShares, is weighted by market capitalization. This means that the largest South Korean companies are well-represented in EWY.
The top 10 holdings for EWY account for nearly half of total assets under management. The largest holding, Samsung Electronics, represents more than 20% of all AUM; investors should understand the potential risks of such a top-heavy ETF. Other large holdings include POSCO (PKX), Hyundai (HYMTF) and Kia (KIMTF).
With more than $4.3 billion in managed assets, this ETF is nearly 30 times larger than any of its direct competitors, most of which are much younger. This makes EWY the only stable ETF in play for the foreseeable future.
DB X-Trackers MSCI South Korea Hedged Equity Fund
Just as EWY is the clear leader among Korean ETFs, second place belongs to Deutsche Bank's X-trackers MSCI South Korea Hedged Equity ETF (DBKO). Excluding the much larger EWY, this fund has five times as much AUM and almost 10 times the trading volume of any other South Korea ETF.
Issued and managed by Deutsche Asset & Wealth Management, DBKO is the best play for currency-hedged ETF exposure in the South Korean market. It tracks the MSCI Korea 25/30 U.S. Dollar Hedged Index. DBKO is also relatively cheap, with an expense ratio of less than 60 basis points.
Currency hedging is a logical choice for any of the Asian Tigers because of their export focus. Exchange rate fluctuations can cripple the returns for investors who are left unprotected; this is DBKO's best competitive advantage over EWY. Nevertheless, this is still a very small ETF, and it can be illiquid.
Korea KOSPI 200 ETF
The KOSPI 200 ETF (HKOR) is a little-known, young and infrequently traded fund, but it could fit as a satellite holding as a Southeast Asian buy-and-hold equity. HKOR has low expenses – 38 bps – and tracks an index of 200 blue-chip firms.
HKOR was issued by the Toronto-based Horizons ETFs Group in 2014, and it represents Horizons' cheapest fund. This is considered a giant value play, but it should not be an actively traded ETF because of its low volume and short track record.
Like all South Korea ETFs, this fund is heavy in technology (Samsung especially). After tech stocks, the HKOR portfolio is surprisingly balanced. Basic materials, consumer cyclical stocks, financial services, defensive stocks and industrials each come in between 9 and 13% of total assets.
