Steady Hands With South Korea ETFs

As one of the most economically advanced emerging markets, South Korea is also one of the least volatile. So advanced and lacking for volatility relative to other developing economies is South Korea that there is ongoing debate regarding whether or not the country should still be considered an emerging market.

Debate aside, those are the traits that have drawn investors to South Korea exchange traded funds.

“If President Park Geun-Hye (the first female leader of South Korea) has her way and successfully implements all three elements of her administration’s three-year economic innovation program, the country could enhance its fragile competitive posture inthe near future vis-a-vis its main industrial rivals in East Asia – namely, China, Japan and Taiwan,” said S&P Capital IQ in a new research note.

With economic reforms expected, South Korea ETFs, such as the iShares MSCI South Korea Capped ETF (NYSEArca: EWY), could be compelling long-term holdings, according to S&P Capital IQ.

“South Korea stands to make impressive gains both economically and financially in the next few years. S&P Capital IQ believes the reforms put forward by President Park, if instituted comprehensively, could pave the way for sustained and more robust economic growth as well as stronger stock and credit market returns for foreign and local investors in the years ahead,” said the research firm.

EWY, the largest South Korea ETF, is rated overweight by S&P Capital IQ.

There are other reasons for long-term investors to consider South Korea ETFs, including the country’s dividend growth potential. South Korea, Asia’s fourth-largest economy, has historically not been an enticing dividend destination. The country’s payout ratio of 12% is piddly even compared to the U.S., where the S&P 500’s payout ratio is still well below its long-term average despite a spate of dividend increases last year and through the first half of 2014. [This Market is no Dividend Destination]

However, there is growing pressure on cash-rich South Korean firms to part with more of that cash and deliver dividends to investors. Last month, the Korea Exchange, the primary exchange operator in Asia’s fourth-largest economy, “will provide incentives for local firms to bolster their dividend payouts from as early as the second half of this year,” according to the Korea Herald.  [South Korea ETFs Could See Dividend Boosts]

Still, investors should consider valuations on South Korean shares, which by way of the market’s defensive nature, are not inexpensive.

“Korea’s shares appear quite expensive when adjudged relative to their emerging Asian benchmark (that is, MSCI’s Emerging Asian index). Yet, what makes it attractive from a valuation standpoint is that it trades at a discount to many of its regional competitors – like Taiwan, Indonesia, India, Malaysia and the Philippines – whereas, when compared to the broader markets, aggregate Korean shares trade at a premium to those of emerging Asia, Asia excluding Japan, Asia and all emerging markets,” said S&P Capital IQ.