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Political Turmoil Poses Risks To Korean ETFs

From Zacks: North Korean leader Kim Jong Un stated recently that the country was close to testing an intercontinental ballistic missile.

In response, U.S. President-elect Donald Trump took to Twitter and stated that “North Korea just stated that it is in the final stages of developing a nuclear weapon capable of reaching parts of the U.S. It won’t happen!” Meanwhile several experts are also of the opinion that North Korea is years away from being able to deliver a nuclear warhead to the U.S. (read: 6 Leveraged ETFs Soaring on Trump Rally)

However, considering that North Korea did perform two nuclear tests in 2016, these threats cannot be disregarded. Many believe that the Obama administration’s policy of “strategic patience” led to the rapid development of North Korea’s arsenal and acceleration of its nuclear and ballistic missile program. North Korea’s missile power stands to hamper global peace and stability with South Korea at the risk of being the worst hit.

South Korea Economy to Take a Hit

Despite being Asia’s fourth-largest economy, South Korea continues to face a number of headwinds that mar its growth prospects. The country’s fading industrial competitiveness, slowing corporate earnings and poor shareholder returns have weighed on the markets for quite some time now (read: Will Emerging Market ETFs Shine Again Under Trump Regime?).

In December, the South Korean government lowered its GDP forecast for 2017 owing to weak domestic demand and unimpressive job growth. It now expects the economy to grow 2.6% next year, much below its previous projection of 3% and Bank of Korea’s expectation of 2.8%.

Meanwhile, North Korea’s military aggressiveness is sure to heighten tension between the countries, as attempts to improve dialogue are expected to die down along their heavily fortified borders.

North Korea’s rising arsenal power would intensify the geo-political risks in the region, which does not bode well for global investors. Most of the South Korea focused ETFs plunged following North Korea’s nuclear test in September. These are expected to be in focus in the following trading sessions as well (read: North Korea Missile Test Hits South Korea ETFs).

ETFs in Focus

iShares MSCI South Korea Capped ETF (EWYFree Report) – The fund tracks MSCI Korea 25/50 Index and has a holding of 109 stocks. The fund’s expense ratio is 0.62% while its dividend yield is 1.21%. EWY has managed to draw $2.8 billion in assets under management (AUM) (see: all Asia-Pacific Developed ETFs here).

Direxion Daily South Korea Bull 3X Shares ETF (KORUFree Report) – The fund seeks to deliver 300% of the performance MSCI Korea 25-50 Index. The fund’s expense ratio is 0.95%. KORU has managed to pull in $3.6 million in AUM.

WisdomTree Korea Hedged Equity Fund (DXKWFree Report) – The fund tracks WisdomTree Korea Hedged Equity Index. The fund’s expense ratio is 0.58%. DXKW has managed to rake in $9.9 million in AUM.

Deutsche X-trackers MSCI South Korea Hedged Equity ETF (DBKOFree Report) – The fund tracks MSCI Korea 25/50 US Dollar Hedged Index and has 107 stocks. The fund’s expense ratio is 0.58%. DBKO has managed to attract $29.6 million in AUM (read: Why Korea ETF Investors Will Pay for Samsung’s Mistake).

Meanwhile, North Korea’s cyber-attacks have become more advanced and frequent. Reportedly the country was behind the hacking of Sony Pictures in 2014 and the breach of South Korean civilian and military institutions that reportedly involved obtaining blueprints for components of the U.S.-made F-15 fighter jet.

Such data breaches drive the need for cyber safety measures, thereby increasing demand for the services offered by security companies. Increased demand for security-related products act as tailwinds for ETFs like PureFunds ISE Cyber Security ETF (HACKFree Report) and First Trust NASDAQ Cybersecurity ETF (CIBRFree Report) (read: Cyber Security ETFs in Focus After Yahoo Hack Report).

The iShares MSCI South Korea Index Fund ETF (NYSE:EWY) was unchanged in premarket trading Wednesday. Over the past year, EWY has gained 8.78%, versus an 11.63% rise in the benchmark S&P 500 index during the same period.

EWY currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #27 of 80 ETFs in the Asia Pacific Equities Ex-China ETFs category.

This article is brought to you courtesy of Zacks Research.

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