South Korea has become a focal point for geopolitical tension, because its neighbor to the north has made increasingly provocative moves with its nascent arsenal of missiles. South Korea plays a strong role in the economy of the Asia-Pacific region, and its manufacturing capacity has made it a key source of electronics and other important goods throughout the global economy. For investors who want to take advantage of the recent strength of the Korean stock market, one particular exchange-traded fund offers a way to drill down on Korean stocks relatively inexpensively. In addition, a closed-end fund also gives investors alternatives to add South Korea to their investment portfolio.
|
Korea ETF |
Assets Under Management |
Expense Ratio |
5-Year Average Annual Return |
|---|---|---|---|
|
iShares MSCI South Korea Capped (EWW 1.36%) |
$3.80 billion |
0.64% |
5.9% |
|
Korea Fund (KF 0.69%) |
$246 million |
1.20% |
2.2% |
Data source: Fund providers.
The index fund method of owning Korean stocks
The easiest way to get exposure to South Korean stocks is by picking a fund that tracks the Korean stock market. The iShares ETF accomplishes that goal by investing in more than 100 Korean stocks across a wide range of different industries. Technology makes up the biggest allocation of the fund's assets, with almost 40% of holdings devoted to tech stocks. However, financials, consumer discretionary ,and industrial stocks add up to a similar-sized position as technology, and materials and consumer staples companies also have a sizable presence within the ETF. Industry giant Samsung makes up more than a fifth of the fund, but overall, the iShares fund does a reasonable job of offering a diversified picture of the South Korean stock market.
Image source: Getty Images.
A closed-end Korea fund
Closed-end funds act a lot like ETFs in terms of trading on major market exchanges. However, because closed-end funds don't allow institutional investors to buy or sell blocks of shares from fund companies like most ETFs do, closed-end investors have to get accustomed to shares selling at premiums or discounts compared to the actual value of their underlying holdings.
The Korea Fund is now the survivor of the Korea closed-end universe, with Korea Equity Fund having liquidated in July. As with the iShares ETF, Samsung makes up a huge position in the Korea Fund, and even though technology has a commanding presence within the fund, areas like industrials, financial services, and consumer stocks make up about half of the portfolio, offering some degree of balance. Expenses are higher for the closed-end fund than for the ETF, which is consistent with the general practice within the closed-end industry. Higher fees have eaten into performance, but it's also important to remember that active management means that fund managers will take positions independently in an attempt to earn above-market returns -- while carrying the risk of underperformance. With shares available at a 10% discount to net asset value, some will see Korea Fund as being worth that risk.
Which Korea fund fits your portfolio best?
The first thing investors need to do before investing in a Korea fund is to see whether they already have exposure to the country's stocks. Many international funds have exposure to Korean stocks, with some fund companies characterizing the country as a developed market while others lump it in with emerging markets. Even having just a small portion of your assets in Korea might meet your needs.
If you want basic exposure to South Korea, then the iShares fund is the easiest way to get it. Korea Fund offers an opportunity for those who think that the current discount will narrow, but its higher expenses make it a questionable choice for long-term investors going forward.
