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Update: iShares MSCI Korea UCITS ETF

Korea-Aktien sind aufgrund des hohen Gewichts von Samsung auch eine Wette auf den IT-Sektor. Sinkende Energiekosten und Makro-Risiken mit Blick auf Region Ostasien sind zwei wichtige Unbekannte.

Kenneth Lamont 10.07.2015

Rolle im Portfolio 

The iShares MSCI Korea UCITS ETF provides large and mid-cap exposure to the South Korean equity market.

Given its individual country focus, this ETF is best utilised as a satellite holding within an already well-diversified portfolio.

Investors in this ETF should be mindful of both single sector and stock concentration. The information technology (IT) sector is heavily represented, with around 40% of index weighting and on an individual stock level Samsung Electronics maintains a quarter of total index weight.

In a typical emerging market index fund, Korean equities would comprise 14-18% of the portfolio, and around 25% of a broader Asian equity fund (as measured by the MSCI EM and MSCI EM Asia respectively). It should be noted that Korea is currently considered an emerging market by MSCI, although most other index providers (FTSE, S&P and Dow Jones) categorise it as a developed market.

Over the same five-year time frame, South Korean equities have also maintained a relatively high degree of correlation to the US IT industry (~70% over 10 years) as measured by the NASDAQ 100 index. Since the US is South Korea's second-largest export market, this strong relationship is not surprising and is unlikely to change to in the near to medium term. Therefore, investors can reasonably expect that changes to economic conditions in the US will affect the growth of firms in the MSCI Korea index, especially those in the IT sector.

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Fundamentale Analyse 

Following five decades of impressive economic growth, South Korea has seen growth levels drop in recent years. Over this period the country has risen to become one of Asia’s most highly developed and wealthy countries. In the process it has become a world leader in the manufacturing of information technology, which contributes towards Korea’s standing as one of the world’s largest exporters.

Fears of following Japan into a ‘lost decade’ of stagnant growth prompted Korea’s President Park Geun-hye to announce a three-year growth-boosting economic reform package. The reforms, first outlined in 2014, mentioned the reformation of heavily indebted public institutions, the paring back of restrictive regulations and the clamping down on unfair market practises. Crucially, for a country so reliant on exports, Park has highlighted the need to stimulate external demand, through the pursuit of more free-trade deals. The free-trade agreement entered into with the European Union in 2011 has been followed in 2014 by similar agreements with Australia and Canada.

In common with its fellow Asia Tigers, South Korea has a high population density and little in the way of natural resources. As a result, Korea is heavily reliant on international markets in order to meet its energy needs. For example, it imports all the oil it consumes, and as a result, its trade balance is very sensitive to fluctuations in oil prices. Over the past few years, turbulent oil and commodity prices contributed to volatile inflation rates in Korea. Rising oil prices and loose monetary policy prompted inflation to peak at 4.7% in July 2011 before sliding to around 1% in mid-2013, where it has hovered since. Falling inflation rates have allowed the Bank of Korea to cut its key lending rate incrementally from 3.5% in 2012, to its current level of 1.5% in support of falling growth rates.

Despite the highly developed nature of the South Korean stock market, it remains vulnerable to actions from its erratic neighbour, North Korea. On-going military tit-for-tat exchanges have seen tensions between the pair intensify. North Korea’s publicly announced aim to develop nuclear weapons, and the resultant nuclear tests have raised serious doubts surrounding the political stability of the region and remain a concern for many investors.

A sustained period of growth in the developed countries is likely to boost global demand for consumer electronics which in turn should bolster returns for the IT technology firms in the index. Additionally, the on-going demand for infrastructure and housing investment in the Middle East, especially in the run up to the Qatar 2022 football World Cup, represent significant opportunities for trade partnership with Korean construction companies.

The Korean equity landscape is dominated by Chaebol. Comparable to Japan’s Keiretsu, these sprawling family-controlled multi-national conglomerates maintain a monopoly position across several different markets. While some Chaebol are one large corporation, others are broken into a group of separate companies linked by name and single-family ownership. In either case the concentration of equity ownership means that much of Korea’s stock market is controlled by a small number of families. 

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Indexkonstruktion

The MSCI Korea Index includes approximately 85% of the free-float adjusted market capitalisation of the South Korean equity market. Component stocks have to fulfil MSCI’s size, liquidity and free float criteria to be included in the index. Eligible securities are weighed by free-float adjusted market capitalisation, which serves to ensure that the underlying liquidity of the holdings is superior relative to a pure market capitalisation weighting. The index is reviewed on a semi-annual basis. As of this writing, the index has around 115 components and is biased towards the information technology sector, representing 40% of its total weighting, followed by consumer discretionary with 14% and financials with 14%. The index has a large single issuer exposure to Samsung Electronics (~22%) which is trailed by electronics manufacturer SK Hynix (~4%) and the Hyundai Motor Company (~4%).

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Fondskonstruktion

The iShares MSCI Korea UCITS ETF uses full physical replication to track the MSCI Korea Index. The fund aims to track the performance of the reference index by owning all the constituent shares in the same weights as those stipulated by the index.To help further improve tracking performance, the fund engages in securities lending and can lend up to 100% of the securities within this fund to improve its performance. In the 12 months through the end of March 2015, an average of 11.51% of the portfolio was out on loan. The lending programme added 9 basis points of net return to the fund. BlackRock, iShares’ parent company and lending agent, keeps 37.5% of gross securities lending revenue for itself, out of which amount it will pay the associated costs of the activity, and passes 62.5% of the revenue to the fund. To protect the fund from a borrower’s default, BlackRock takes collateral greater than the loan value. Collateral levels vary from 102.5% to 112% of the value of the securities on loan, depending on the assets provided by the borrower as collateral. This fund uses futures for cash equitisation purposes, which also helps to reduce tracking error.

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Gebühren

The fund levies a total expense ratio (TER) of 0.74%. This lies at the upper range for ETFs tracking Korean equities. Moreover, the tracking difference (fund return – index return) over the past few years suggests that the annual cost of holding the fund tend to be higher than the TER. This can be mainly attributed to rebalancing costs whenever the index changes composition. It should be remembered that there are additional, investor-specific costs associated with trading the ETF, such as bid/offer spreads and brokerage commissions, which should be factored into an investment decision.

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Alternativen

As of writing, there are several alternative ETFs providing equity exposure to South Korea.

The most popular alternative in terms of assets under management is the db X-tracker MSCI Korea Index UCITS ETF, which physically tracks the same index as the iShares fund. This ETF levies a TER of 0.65%.

Investors seeking exposure to only the very largest South Korean equities may also consider the DJ South Korea Titans 30 Theam Easy UCITS ETF, which tracks the 30 largest and most liquid companies traded in the country. This ETF uses synthetic replication and charges a TER of 0.55%.

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Über den Autor

Kenneth Lamont  ist Fondsanalyst bei Morningstar.