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South Korea Exports Surge: ETFs in Focus

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South Korean exports increased for the ninth straight month in July. It expanded nearly 20% year over year owing to increased global demand and improving global economic sentiment.


The country’s consumer prices grew 2.2% in July on a year-over-year basis compared with a 1.9% increase in June. Core CPI, which excludes food and oil prices, increased 1.8% year over year in July compared with a 1.4% increase in June (read: South Korea Keeps Rates Unchanged: ETFs in Focus).


The central bank raised its GDP growth forecast to 3% compared with its earlier prediction of 2.6% in April. The primary reason for the optimistic outlook is a recovery in exports, which is a major determinant of the country’s performance, coupled with fiscal expansion brought in by the recently approved 11 trillion won extra budget plan.


South Korea’s premier, Moon Jae-In expects to create a large number of jobs with this extra spending and the finance ministry expects a 0.2% addition to GDP growth owing to this (read: Asia Business Optimism at 3-Year High: ETFs in Focus).


The surge in exports overpowered the imports, which grew 14.5% in July, compared with a rise of 19.8% in June. South Korea is heavily dependent on international sales, as exports account for almost 50% of the country’s GDP. However, the country still faces risks of rising trade protectionism across the world and possibility of reduced demand, in case oil continues to tumble.


Let us now discuss a few ETFs focusing on providing exposure to South Korea (see all Asia-Pacific (Developed) ETFs here).


iShares MSCI South Korea Capped ETF (EWY - Free Report)


This fund is the most popular in the space offering exposure to South Korean equities.


It has AUM of $3.86 billion and charges 64 basis points in fees per year. From a sector look, Information Technology, Financials and Consumer Discretionary take the top three spots, with 37.68%, 15.29% and 12.64% allocation, respectively (as of July 28, 2017). Samsung Electronics Ltd, Sk Hynix Inc and Posco are the top three stocks with 22.69%, 4.64%, and 3.01% allocation, respectively (as of July 28, 2017). The fund has returned 26.13% in the last one year and 30.97% year to date (as of July 31, 2017).


AdvisorShares KIM Korea Equity ETF (KOR - Free Report)


This fund seeks to offer exposure to South Korean growth equities in the mid-to-large cap segment.


It has AUM of $9.95 million and is relatively expensive as it charges 99 basis points in fees per year. From a sector look, Information Technology, Industrials and Consumer Discretionary take the top three spots, with 32.0%, 18.7% and 13.9% allocation, respectively (as of June 30, 2017). Samsung Electronics Co Ltd, Hyundai Motor Co and Posco are the top three stocks with 19.68%, 3.87% and 3.87% allocation, respectively (as of June 30, 2017). The fund has returned 28.39% year to date (as of July 26, 2017).


First Trust South Korea AlphaDEX Fund (FKO - Free Report)


This fund seeks to employ quantitative-based screening techniques to identify stocks poised to generate great alpha.


It has AUM of $5.50 million and is relatively expensive as it charges 80 basis points in fees per year. From a sector look, Financials, Information Technology and Materials occupy the top three spots, with 19.10%, 17.29% and 16.39% allocation, respectively (as of July 28, 2017). Korea Electric Power Corporation, Hanwha Chemical Corp and Lotte Chemical Corporation are the top three stocks with 3.66%, 3.57% and 3.51% allocation, respectively (as of July 28, 2017). The fund has returned 16.68% in the last one year and 26.19% year to date (as of July 31, 2017).


Bottom Line


Despite impressive exports, the economy still faces major headwinds. With increased threats from North Korea escalating geopolitical risks and subdued wage growth, it is still difficult to predict the path economic growth will take in Korea’s economy. Moreover, there is high uncertainty around oil prices, which might adversely affect global demand. Therefore, we believe it is best to remain on the sidelines for now.


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