An ETF Idea For A Steady Emerging Market

South Korea, Asia’s fourth-largest economy, has been a favorite of investors daring enough to take positions in single-country exchange-traded funds particularly, because one does not need to be all that daring to be involved with South Korean stocks. Relative to other emerging markets, South Korea’s equity markets are docile and low beta.

At least that is the case on a historical basis. This year, the largest South Korea exchange-traded fund trading in New York has slightly underperformed the MSCI Emerging Markets Index. South Korea is the second-largest country weight in that benchmark behind China.

Although the U.S. dollar has come under fire this year, leading to the same treatment for currency hedged ETFs, hedged South Korea ETFs have been stout performers. For example, the WisdomTree Korea Hedged Equity Fund (NASDAQ:DXKW) is up nearly twice as much year-to-date as the largest U.S.-listed South Korea ETF, which is not a currency hedged fund.

Docile, But Diligent

It is widely known that South Korean companies and Japanese companies are close competitors. Since November 30, 2012, two weeks prior to the election of Japanese prime minister Shinzo Abe, the South Korean won has appreciated approximately 24 percent versus the Japanese yen. From December 31, 2015, to March 16, 2016, the South Korean won depreciated 8 percent against the Japanese yen, said WisdomTree in a new research note.

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Bolstering the case for further examination of ETFs like DXKW is news out Monday that South Korea is replacing four of the seven members of the Bank of Korea’s board, which the Wall Street Journal reports could be a sign of a more prominent government voice on the central bank’s leadership committee.

One need not be an Ivy League economist to figure out that if South Korea policymakers want a larger role in monetary policy, it is likely in an effort to keep pace with rival Japan and weaken the won. Obviously, that would be a positive for a currency hedged ETF such as DXKW.

South Korea’s benchmark lending rate is 1.5 percent, indicating there is some room for interest rate reductions, although the Bank of Korea has stood pat for nine straight meetings.

While we see opportunity in South Korea, its important to note that the key drivers of performance were the equity returns alone. Layering on currency risk (inherent to all unhedged international investing) dragged down the total performance, added WisdomTree.

DXKW allocates nearly 26 percent of its weight to materials stocks, one of the best-performing sectors in South Korea this year. Technology is the ETF’s largest sector weight at 26.4 percent.

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