Have you considered adding any single country ETFs to your portfolio? If so, I would like to bring your attention to an ETF that has had great long-term performance but recently experienced a nice market dip due to some geopolitical rhetoric from both sides of the Pacific.
Of course I am talking about the most popular South Korean ETF, the iShares MSCI South Korea Capped ETF (EWY : $EWY). This single country ETF is generally considered an emerging market fund, but with the sophistication of South Korea, I would be more inclined to call it a developed market fund. This ETF has been around for a long time compared to the overall ETF marketplace. iShares started this fund on May 9, 2000. Since that time it has significantly outperformed the S&P 500 index, but with the typical high volatility of many emerging market funds.
As we’ve all been told before, past performance is not a guarantee of future results, but we can certainly derive some expectations from past performance. Backtesting portfolios and funds is done every day in every financial advisory firm. Advisors cannot properly convey to their clients what their recommendations are without presenting past performance data. That is why I am very comfortable looking at the long-term past performance of an ETF to help me decide whether I want to invest in it or not. So, let’s take a look at the performance of EWY over the last 17 years. (Click charts to enlarge.)
Some of the key takeaways from this chart is the 8.75 CAGR (compounded annual growth rate) of EWY. That is a 3.56 higher CAGR than the S&P 500 fund. In addition to the outperformance, EWY has a relatively low correlation coefficient to the US market at only 0.74. This correlation is important and significant if you are building a diversified investment portfolio. Of course there is no free lunch when it comes to that kind of performance. If you invest in EWY, you will be accepting high volatility and considerable drawdowns. If you can deal with the volatility, I believe you can harness it by purchasing EWY on the dips.
Many financial pundits have warned us about the risks of single country equity funds. Their warnings are not without basis, but sometimes their concerns are overstated. Afterall, isn’t the S&P 500 index a single country index? I do understand that investing in, let’s say, Russia, is far different than investing in a U.S. index fund. But, I don’t think it’s fair to lump all single country funds into the same basket. The South Koreans are very advanced in education, technology, culture, politics, finance and trade. Although they do have to deal with a belligerent dictator north of their border, South Korea is certainly not a third-world or unsophisticated country.
I have reviewed the prospectus and fact sheet for the EWY ETF and I recommend any potential investor do the same. I am already sold on this ETF, but one concern that I do have is the dominance of Samsung in it. As of August 14, 2017, Samsung Electronics was 21.92% of the portfolio. While I don’t like that; it hasn’t deterred me from wanting part of my portfolio in EWY.
Here are some additional facts to consider when in investing in this South Korean ETF (as of August 14, 2017):
- Expense ratio: 0.64%
- Yield: 1.20%
- Number of holdings: 113
- Benchmark: MSCI Korea 25/50
- 90 Day average volume: 3,000,000 shares per day (Source: NASDAQ)
- Price to earnings ratio: 13.34
- Price to book ratio: 1.15
If you are considering any single country ETFs for your portfolio, I recommend this South Korean ETF. Personally, I believe EWY is a good fit in our portfolio. But please, consider the risks involved and do your own due diligence before investing in it.
Full disclosure: I do not currently own any shares of EWY but I do intend to purchase shares in the near future.
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