Top Ranked iShares MSCI South Korea Index ETF In Focus (EWY)
Eric Dutram: Economic uncertainty all over the world has taken a toll not only on the developed equity markets, but it has also cast a shadow over some of the emerging markets as well. This hasn’t just hurt smaller and riskier nations though, as even the largest of the emerging markets, China, has become a risky avenue for investors, a notion largely attributable to the shaky growth outlook surrounding the country (Three China ETFs Still Going Strong).
Yet despite this, not all emerging and quasi-developed nations have seen trouble in 20102. Of these, Asia’s fourth largest economy, South Korea, has been a solid performer. In the recent global economic turmoil, the South Korean economy somewhat less affected by the uncertainty as the nation is regarded as one of the stable economies of Asia (South Korea ETF Investing 101)
According to the International Monetary Fund forecasts, the South Korean economy is expected to grow at the rate of 2.7% in 2012. Gross national income per capita was $20,870 last year, compared with Japan’s $45,180 and Hong Kong’s $35,160, according to World Bank data.
The resilience of this economy even during such times of global financial turmoil may be attributed to the strength of three world beating Korean companies, namely, Samsung, Hyundai Motor Co. and its affiliate Kia Motors Corp. (Forget the BRIC ETFs, Focus on the PICKs).
However, export plays a key role in South Korea’s economic structure, as half of the economic output is dependent on their exports. South Korea exports a major part of its goods to European and U.S. markets. The protracted economic weakness in these two regions has therefore hurt exports from South Korea due to deflating demand (Are Korean ETFs In Trouble?).
The country is nevertheless pursuing certain measures so as to provide a boost to domestic demand and in order to set off the slowdown of exports to U.S. and European markets.
Investors looking to tap this economy in basket form can invest in MSCI South Korea Index Fund (EWY) which is a #1 Zacks ETF Rank (Strong Buy) fund. We expect it to outperform its peers over the next year. Given this, the product could be worth a closer look by investors seeking exposure to this economy.
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also receive one of three risk ratings, namely Low, Medium, or High.
The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks Rank reflects the expected return of an ETF relative to other products with a similar level of risk.
For investors seeking to apply this methodology to their portfolio in the South Korea market, we have taken a closer look at the top ranked EWY below:
iShares MSCI South Korea Index (NYSEARCA:EWY)
Launched in May 2000, EWY is linked to the MSCI Korea Index. The Index has been designed to measure the performance of the broader South Korean equity markets. The index is a float adjusted, market capitalization weighted, meaning that it mostly consists of large cap stocks.
The fund is rich in both volume and asset base. It trades with an asset base of $2,842.3 million and is considered to be one of the most liquid options available in the space, as it trades with a volume level of more than two million shares per day (Guide to Most Popular ETFs).
EWY provides exposure to 107 South Korean securities which mostly covers the large cap section of the market spectrum. The fund appears to be well concentrated in its top 10 holdings as nearly 50% of the asset base goes towards these securities.
Investors should also note that in terms of top securities, one of the top technology firms in the world, Samsung, plays a very dominant role in the fund with 22.3% of the asset base allocation. So the fund’s impressive performance last year is largely driven by Samsung and this firm’s return to prominence.
This is closely followed by other large companies of the South Korean economy which play a very influential role in its growth. Hyundai takes a share of 5.7% in the fund while Posco is allocated 3.7% of the asset base. Kia takes the sixth position in the fund with an asset allocation of 2.6%.
Among sectors, the fund appears to be highly invested in Information & Technology. The fund allocates 33.3% of the asset base to the sector. Other than this, the fund assigns double-digit allocation to consumer discretionary, financials, industrials and materials. Among others, the fund does not invest more than 5.99%.
The performance of EWY in 2011, however, was disappointing as it delivered a negative return of 11.73%. This is mostly attributed to weak demand for Korean goods from U.S. and Europe which led to export shrinkage. However, in the last one year, the fund has done a good job setting off all the losses of 2011 and delivering a return of 21.9% (Inside The Two ETFs Up More Than 140% YTD).
The fund charges a fee of 59 basis points annually from investors and has generated a yield of 0.64% per year in the process.
In 1978, Len Zacks discovered the power of earnings estimates revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank, a peerless stock rating system whose Strong Buy recommendation has an average return of 26% per year.