Amid heightened geopolitical tensions, the iShares MSCI South Korea Capped ETF (NYSEArca: EWY) is lower by more than 7% over the past month. That is a rough performance for the largest South Korea exchange traded fund and the fund experienced losses even after President Trump recently met with North Korean leader Kim Jong Un.
EWY’s recent declines have taken the benchmark South Korea ETF more than 7.5% below its 200-day moving average and nearly 15% below its 52-week high. However, the case for EWY is not lost as South Korea, Asia’s fourth-largest economy, is still on solid economic footing.
Fitch Ratings reaffirmed South Korea’s sovereign debt rating of AA- with a stable outlook.
“Korea’s sovereign ratings balance robust external finances and a strong macroeconomic performance with ongoing geopolitical risk from the relationship with North Korea, and longer-run challenges of rapid population ageing and low productivity,” said Fitch Ratings in a recent note.
South Korea ETF Looks to Tech
The $3.84 billion EWY, which is one of the largest single-country emerging markets ETFs trading in the U.S., turned 18 years old last month. EWY tracks the MSCI Korea 25/50 Index and is usually one of the least volatile country-specific emerging markets ETFs, a reputation that has been betrayed in recent weeks.
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Still, EWY is a credible play on one of the world’s most most technologically advanced economies, a point underscored by the fund’s nearly 37% weight to tech stocks. That is more than double EWY’s second-biggest sector weight, financial services.
“Korea’s growth performance remains strong and has been resilient to fluctuations in the perceptions of geopolitical risk,” said Fitch. “Despite the escalation of tensions during the second half of 2017 and first months of 2018, real GDP growth reached 3.1% and Fitch expects growth momentum to be sustained, albeit at a slightly lower level of 2.8% in 2018 and 2.7% in 2019.”
Year-to-date, investors have added nearly $68 million to EWY.
“The threat of a trade war between the US and China represents a downside risk to Korea’s growth outlook, as 28% of its exports that are destined for China are partly intermediate goods that are subsequently re-exported,” according to Fitch.
For more information on South Korean markets, visit our South Korea category.