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South Korea ETFs Soaring Despite Looming VWO Sales


ETFs tracking South Korean equities are defying logic these days.


ETFs tracking South Korean equities are defying logic these days. With the Vanguard MSCI Emerging Markets ETF (NYSEARCA:VWO), the largest emerging markets ETF by assets, poised to drop the MSCI Emerging Markets Index next year in favor of the FTSE Group equivalent, some analysts and investors expected a sell-off in South Korean stocks.

The reason being because the FTSE Emerging Markets Index does include South Korea as a developing nation. That means Vanguard, the third-largest US ETF sponsor, will have to dump South Korean equities as VWO transitions to the FTSE index. As of the end of October, South Korea accounted for 15.3% of VWO's weight.

VWO currently holds shares of industrial conglomerate Samsung, the fund's largest holding, automakers Hyundai and Kia and steelmaker Posco (NYSE:PKX), among other South Korean stocks.

Despite assurances from Vanguard that its index transition will be efficient, gradual, and orderly, there has been ample speculation that South Korean stocks will come under pressure due to the switch.

That is not happening. At least not yet. It is not unreasonable to say nearly everyone that follows ETFs and nearly everyone that follows South Korean stocks knows Vanguard has to sell Samsung, Kia, and friends. Vanguard announced the index switch on October 2. Since then, the $3 billion iShares MSCI South Korea Index Fund (NYSEARCA:EWY) is fractionally lower.

EWY's loss is nothing to complain about when noting the aforementioned four stocks combine for 34.3% of the fund's weight. All four are found among EWY's top-10 holdings. Alone, Samsung accounts for 22.2% of EWY's weight.

Perhaps even more impressive is the fact that over the past month, EWY has shown no ill-effects of the Vanguard change as the ETF has gained 3.1%.

EWY is not alone. Unbeknownst to many investors, there is another South Korea ETF on the market: The First Trust South Korea AlphaDEX Fund (NYSEARCA:FKO). Unlike EWY, the First Trust South Korea AlphaDEX Fund is not traditional market cap-weighted ETF. Rather, FKO uses growth and value factors such as sales to price and one year sales growth, book value to price, cash flow to price and return on assets to screen for possible constituents.

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No positions in stocks mentioned.

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