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The overall performance of South Korean markets has largely been negative this year, with the won weakening, the credit market in turmoil and equity markets falling over 20%. Although macro headwinds are likely to persist in the medium term, South Korea ETFs are likely to provide good exposure in the long term.
South Korea is an export economy, and weak economic forecasts for the country stem from weakening global demand and rising inflation. “However, the fundamentals and outlook remain positive, also thanks to the new government, which is in line with other selected emerging markets. Investors’ concerns are being expressed in favorable valuations,” wrote Marcus Weyerer, Senior ETF Investment Strategist at Franklin Templeton, for AsiaFundManagers back in July.
Despite the consolidation in South Korean financial markets, Fitch Ratings has affirmed the country’s ‘AA-’ rating on the back of sound fundamentals even in a slowing growth environment.
“Despite the near-term challenges, we continue to like global industry leaders in key Asian export sectors, including technology stocks in South Korea and Taiwan that have favourable long term secular growth drivers,” Schroders said in its recently published 2023 Outlook. On the other hand, analysts at Goldman Sachs see South Korea’s Kospi Index rallying 11% in the next 12 months and predicts that Kospi would be the best-performing benchmark index in the region going forward.
In this likely scenario of a turnaround, here are some key ETFs for adding South Korea to investor portfolios.
iShares MSCI Korea ETF
Part of the BlackRock investment product portfolio, the iShares MSCI Korea ETF (IE00B5W4TY14) is benchmarked against the MSCI Korea 20/35 Index, which tracks large and mid-cap stocks in the Korean market and covers nearly 85% of all free-float-adjusted market capitalization in the country. Launched in 2010, the ETF is passively managed with a base currency of the US dollar.
The fund has $397.6 m of assets under management, with total shares outstanding of 2.66 million.* As a passively managed fund, the constituents are rebalanced every quarter by tracking South Korean equities in the MSCI Index. The ETF has a total expense ratio of 0.65%.
The ETF has total of 112 holdings with a price-to-book ratio of 1.01 and a price-to-earnings ratio of 7.87.* The 3Y Beta of the fund was 1.001, as of October 31.
On the sustainability front, the ETF has a rating of BBB by MSCI ESG Fund Rating (AAA-CCC), and a score of 5.55 as per the MSCI ESG Quality Score (0-10). These ratings are not indicative of the ESG characteristics integrated into the fund.
The top five holdings of the ETF are Samsung Electronics (28.07%), SK Hynix (4.90%), KRW CASH (4.71%), Samsung Electronics non-voting preferred shares (4.43%) and Samsung SDI (4.08%). Sector-wise, the ETF has 44.55% investment in IT stocks, followed by industrials (9.69%), materials (9.54%), financials (9.23%) and consumer discretionary (8.59%).*
Since its inception, the fund has returned 32.55% to investors, compared to the benchmark rising 43.40%. The ETF’s muted performance, despite being around for over a decade, is largely due to the year-to-date losses of 35.30%.
Xtrackers MSCI Korea ETF
Part of the DWS Group, the Xtrackers MSCI Korea ETF (LU0292100046) was established in 2007 and tracks the MSCI 20-35 Custom Index, which is similar to the MSCI 20/35 Index but has a weightage buffer of 10% for index rebalancing. The ETF has a base currency of US dollar and comes with a dividend yield of 2.59%.
As of September 30, the ETF had a price-to-earnings ratio of 7.12, while holding a total of 111 Korean securities. The fund has total assets under management of $72.32 m with outstanding shares of 1.05 million. The fund has a total expense ratio of 0.65%.
The ETF is 99.67% invested in equities, but also holds some preferred shared, cash and rights issue. The top five holdings of the ETF are Samsung Electronics (28.02%), SK Hynix (4.89%), Samsung Electronics Preferred shares (4.42%), Samsung SDI (4.08%) and LG Chem (3.71%).* Sector-wise, the ETF is invested in IT (43.21%), consumer discretionary (10.01%), industrials (9.61%), financials (9.11%) and materials (8.42%).**
Since its inception, the fund has returned 11.87% to investors. Year-to-date, the fund has registered a decline of 28.70%, whereas the benchmark index has fallen 28.73%.
Franklin FTSE Korea ETF
The passively managed Franklin FTSE Korea ETF (IE00BHZRR030) was launched in 2019 and tracks the performance of the FTSE Korea 30/18 Capped Index, which represents the performance of large and mid-cap Korean stocks. The major difference between this ETF compared to other Korea ETFs mentioned above is the low total expense ratio of 0.09%.
The ETF has total assets under management of $380.39 m* and total shares outstanding of 13.1 million. The fund is managed by Dina Ting and Lorenzo Crosato.
Since its inception, the ETF has returned 0.74% to investors, compared to the rise of 0.80% in the benchmark index. The year 2020 was the best for the fund when it gave 45.04% returns, in line with the benchmark index, but the gains have been erased by the year-to-date decline of 34.99%.
The ETF has a total of 162 holdings, with a price-to-book ratio of 0.92 and a price-to-earnings ratio of 8.66.*
The top five holdings of the fund are very similar to the ETFs mentioned above. The largest stock in the portfolio is Samsung Electronics (27.61%), followed by SK Hynix (4.54%), Samsung Electronics Preferred shares (4.40%), Samsung SDI (3.66%) and LG Chem (3.28%).*
Sector-wise, the fund is invested in IT (43.24%), industrials (10.98%), financials (9.31%), materials (9.06%) and consumer discretionary (8.81%).*
While the ETF invested 99.69% in equities, it also holds 0.31% of its assets in cash & cash equivalents.
* as of November 24, 2022
** as of September 30, 2022
