He thinks South Korean stocks don’t yet reflect the sharp improvements in corporate profits, noting that the iShares fund is still cheap when compared to other emerging market ETFs. For context, this fund trades for 9.2 times projected 2017 earnings, according to Morningstar, compared to 12.0 times earnings for the iShares Core MSCI Emerging Markets ETF.
The longer-term the challenge for South Korea is to keep focused on the development of a thriving domestic economy that is less exposed to the vagaries of global trade. President-elect Moon is fortunate that he inherits a truly world-class economy.
South Korea scores top marks for its highly educated and skilled workforce, ease of doing business, strong emphasis on R&D, and tech infrastructure. Those gains have boosted per capita incomes above $34,000 per year, up from just $67 per year back in the 1950’s.
The most popular choice for Korea-focused investors remains the iShares fund, with around $3.2 billion in assets and a 0.64 percent expense ratio. It tracks the returns of the MSCI Korea 25/50 Index and is the largest of the South Korea-focused ETFs. Around one-third of the fund’s assets are invested in the export-focused tech and industrial sectors. Yet another 40 percent of the fund has more of a domestic focus on consumer and financial stocks.
Skip The Currency Risk
An option for investors worried about currency risk is the Deutsche X-trackers MSCI South Korea Hedged Equity ETF (DBKO), which tracks the same index as the more popular iShares fund and strips out exposure to fluctuations in the South Korean won. The slightly lower 0.58 percent expense ratio helps to offset the fact that the currency hedge has not paid off recently. This fund, with $28 million in assets, has rallied 9.91 percent this year, nearly seven percentage points lower than its iShares rival.
The Active Hand
In contrast to those two passive ETFs, the AdvisorShares KIM Korea Equity ETF (KOR) cherry picks the Korean mid- and large-cap stocks that have the best combination of attractive valuations and above-average growth prospects. The fund also makes a macro wager on sector strength, for example, by increasing an emphasis on consumer stocks when that part of the economy is more robust.
Investors pay a stiffer 0.99 percent expense ratio for that active approach. The fund was launched in September 2016 and its 7.9 percent return (through the end of April) has thus far not yet kept up with the MSCI Korea Index and its 10.8 percent return during that period.
South Korea’s decades-long efforts at modernization have placed its economy in strong shape by a range of global competitiveness measures. The combination of a firming global economy, a blend of robust exports and rising domestic spending makes this nation a solid long-term investment for those who believe the current turmoil on the Korean Peninsula will pass just as other tense moments there have during the past six decades.