The iShares MSCI South Korea Capped ETF (NYSEArca: EWY) is up nearly 8% over the past month, bringing its year-to-date gain to close to 40% and on Tuesday, the South Korea exchange traded fund broke out to new highs.
EWY, which tracks the MSCI Korea 25/50 Index, holds 112 stocks. Amid the geopolitical wrangling, the ETF has recently lost some assets, but is traditionally a favorite among investors due to South Korea’s advanced economy and the country’s emphasis on technology.
“The runaway rally in EWY may come as a surprise to those who have followed the breathless (and seemingly endless) headlines warning of an imminent nuclear strike by South Korea’s contentious neighbor to the north,” according to Schaeffer’s Investment Research. “But make no mistake; the low-volatility uptrend in EWY is currently accompanied by a volatility skew that points to a fairly robust degree of anxiety among Seoul-focused speculators.”
South Korea, Asia’s fourth-largest economy, is the second-largest country weight in the MSCI Emerging Markets Index behind China. The $3.9 billion EWY is about 17 and a half years old, making it one of the oldest emerging markets single-country ETFs. EWY has a three-year standard deviation of just over 17%, which is low compared to many other single-country emerging markets funds. That historical lack of volatility is one reason why EWY is a favorite among investors.
“As of Thursday, 30-day historical volatility on EWY registered a new 52-week low of 9.8%. Meanwhile, as of about midday Friday, Trade-Alert pegged the 30-day at-the-money implied volatility (IV) at 16%, in the 16th percentile of its annual range — generally speaking, a fairly reasonable premium over the unusually low realized volatility figure,” according to Schaeffer’s.
Related: How South Korea is Critical to The Global Economy
EWY allocates 40.7% of its weight to technology stocks, by far the ETF’s largest sector allocation. Financial services and consumer discretionary names combine for 26% of the fund’s roster. Data suggest some traders have recently been building short positions in the South Korea fund.
“Likewise, short interest on EWY vaulted 53.6% higher over the past two reporting periods to stand at 6.24 million shares,” notes Schaeffers. “That’s the largest accumulation of EWY short interest since January 2016 — and it’s important to note that the short interest peak attained nearly two years ago roughly coincided with EWY’s 2016 lows. As the shorts covered their shares in the weeks and months that followed, EWY embarked on the uptrend that has most recently culminated in Friday’s new 10-year price peak.”
For more information on the South Korean markets, visit our South Korea category.