In an attempt to reverse a slowdown in growth, the Bank of Korea issued its first rate cut in over a year, lifting South Korea stocks and related exchange traded funds.
The First Trust South Korea AlphaDEX Fund (NYSEArca: FKO) rose 2.1% Thursday while the iShares MSCI South Korea Capped ETF (NYSEArca: EWY) was up 0.9%. Year-to-date, FKO increased 1.4% and EWY gained 2.0%.
South Korea’s central bank cut its benchmark rate to 2.25% from 2.5%, the lowest since 2010 and the first rate cut since May 2013, as a way to kick start a stagnate property market and bolster growth that slowed last quarter to its weakest in over a year, Bloomberg reports.
“Policy makers are pumping up the economy through all possible means,” Daewoo Securities Co. fixed-income analyst Yoon Yeo Sam said in the article. “The ball is now in the court of consumers and businesses. If they don’t respond as much as expected, the government and central bank may have to take more action.” [Bull Case for South Korea ETFs]
The First Trust South Korea Fund, which follows a type of smart-beta index based on growth and value factors, may be benefiting from its lower allocation to mega-cap stocks. Specifically, FKO includes a 24.6% position in mega-caps and a 75.4% weight toward large-caps. Meanwhile, EWY shows a heftier 54.1% weight toward mega-caps, with a 18.9% position in Samsung Electronics.
Despite the bearish effects of a rate cut on a country’s currency, the South Korean won shrugged off the cuts and appreciated to 1,020.93KRW per USD.
Barclays strategists viewed the BOK rate cut as a “one and done adjustment to restore confidence,” designed to spur growth, “with the main impulse coming in early 2015,” MNI reports. Consequently, Barclays expects the won to continue strengthening. [The Steadiness of South Korea ETFs]
Korea hedged equity ETFs, WisdomTree Korea Hedged Equity Fund (NasdaqGM: DXKW) and db X-trackers MSCI South Korea Hedged Equity Fund (NSYEArca: DBKO), which both try to limit the effects of currency fluctuations, would underperform non-hedged ETFs if the won continued to strengthen against the U.S. dollar. DXKW was up 0.7% Thursday and DBKO was down 0.8%.
FKO and EWY do not hedge their currency risk, so an appreciating won would make the Korean won-denominated assets worth more in U.S. dollar terms.
However, potential investors should keep in mind that FKO, DXKW and DBKO have relatively low assets and should utilize limit orders to better execute any trades on the securities.
First Trust South Korea AlphaDEX Fund
For more information on South Korea, visit our South Korea category.
Max Chen contributed to this article.