Analyse: db x-trackers MSCI Korea Index UCITS ETF 1C

Auch wenn Korea längst nicht mehr auf dem Entwicklungsstand eines klassischen Emerging Markets ist, ist die Korrelation mit dem MSCI Emerging Markets sehr hoch. Samsung das Index-Schwergewicht.

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The db x-trackers MSCI Korea Index UCITS ETF offers exposure to the broad Korea equity market, with its underlying benchmark, the MSCI Korea Index, covering about 85% of the South Korea equity universe. Given its single-country exposure, this ETF would be ideal as a core equity holding for investors aiming to build a Korean-centric investment portfolio. Meanwhile, this ETF can take on a satellite holding role for investors looking to gain exposures to Korea within a broader geographical portfolio. This ETF can also be used tactically to roll out bets on the Korean market.

South Korea is an export-driven economy, with exports of goods and services accounting for 57% of GDP in 2012. As a result the MSCI Korea Index has a heavy tilt to large exporters with a cyclical orientation, mainly within the IT (36%), consumer discretionary (18%) and industrials (12%) sectors. Investors who are bullish on global growth can consider this ETF.

Over the past three years, the MSCI Korea Index has been more correlated to emerging markets (e.g. 90% correlation to the MSCI Emerging Markets Index and 93% to the MSCI EM Asia Index) than to developed markets (e.g. 73% correlation to the MSCI World Index and 68% to the S&P 500 Index). In our view, these figures suggest that the diversification effect of this ETF to a global portfolio is limited. 

Interestingly, the MSCI Korea Index has shown a lower correlation with the domestic Chinese indices (e.g. 40% correlation to the MSCI China A Index and 41% to the CSI 300 Index in the past 3 years; both at 60% in the past year). These figures suggest that this ETF could offer good degree of diversification for investors with a portfolio concentrated in domestic Chinese equities.

South Korea accounts for quite a considerable weighting in some of the emerging market equity indices (e.g. 16% in the MSCI Emerging Markets Index and 26% in the MSCI Emerging Asia Index). It is worth noting that MSCI has kept South Korea under review for potential elevation to developed market status, while FTSE already considers it as a developed market in its international index. We therefore advice investors to check their existing exposure to South Korea to avoid unintentionally creating concentrated exposure in Korean equities and “emerging markets” according to the chosen definition. 

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Fundamentale Analyse

South Korea is the fourth-largest economy in Asia after China, Japan and India. After a number of rate cuts in the past year and the implementation of a stimulus plan, Korea’s economy appears to have been revived as GDP grew by 1.1% QoQ in Q3 2013 (vs 1.1% and 0.9% QoQ respectively in Q2 and Q1), or 3.3% YoY, compared to 2.0% growth in 2012. The government also raised the country’s growth forecast to 2.8% for 2013 (1.9% in the first half; 3.6% in the second half) from its earlier expectation of 2.3%, which it forecasted earlier in 2013. The government expects the economy to further strengthen and GDP to grow by 3.8% in 2014. Despite a more upbeat economy, it is worth noting that, due to its export-driven nature (e.g. exports accounted for 57% of GDP in 2012), Korea’s economy would likely be affected upon a further deterioration of global economic conditions. The recent depreciation of the Yen has made Japanese goods far more competitive, placing serious pressure on Korean manufacturers. Investors should also be mindful of the potential for escalating political and military tension between South and North Korea—which tends to have a negative impact on South Korea’s financial markets.

Samsung Electronics (005930) accounts for 24% of the index and it is by far its largest holding. This technology giant (manufacturer of consumer electronics, mobile phones, memory chips and LCD panels), has become the world’s largest handset maker with a 30.4% market share of the world’s smartphone market, followed by Apple (AAPL) at 13.1% as of Q2 2013, according to IDC. Increasing competition, which has put pressure on Samsung’s market share--which slipped from 32.7% in Q1 2013 to 30.4% in Q2--and the expectation for further growth in demand for electronics products is likely to weigh on Samsung’s earnings and share price performance, not to mention the risks associated with the numerous patent lawsuits around the world between Samsung and Apple. Adding other IT firms, IT exposure accounts for 36% of the index.

Consumer discretionary is the second largest exposure of the index, accounting for 18% of its market capitalisation. This exposure consists largely of carmakers and their related business. The main exponents are Hyundai Motor (the second-largest holding of the index at 6%), Hyundai Mobis (3%) and Kia Motors (3%). Sales for these companies are highly export-driven (e.g. 64% for Hyundai for the first 8 months of 2013).

The other three main sector exposures for this ETF are financials (14%), industrials (12%) and materials (10%). The financials sector consists of banks, securities and insurance firms while the industrials sector consists of some of the world’s largest shipbuilders as well as construction and engineering firms. The materials sector includes the steel maker POSCO (005490, the third-largest holding of the ETF at 3%) and chemical companies. The industrials and materials sectors are largely export-driven and so their performance would be affected by the global economy and also intense competition. As it pertains the financials sector, the highly indebted household situation of the nation is an area to be cautious on (e.g. debt-to-disposable income ratio rose to 163.7% in 2011 from 158% in 2010). 

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This ETF tracks the MSCI Total Return Net Korea Index, a free-float market capitalisation weighted index representing 10 sectors across the Korean stock market with 105 constituent stocks as of this writing. Component stocks have to fulfill MSCI’s size, liquidity and free float criteria to be included in the index. MSCI uses the official exchange closing prices to calculate the index’s value. The index is reviewed on a semi-annual basis with minor quarterly reviews to accurately reflect the evolving marketplace. The index is top heavy with the 10 largest constituents accounting for 52% of the total market capitalization of the index. The index has a large concentration in the IT sector at 36%, with technology giant Samsung Electronics (005930) accounting for 24% of the index. Other major sector weights include consumer discretionary (18%), financials (14%), industrials (12%) and materials (10%). Except from the heavy weight in Samsung Electronics, stock concentration is minimal, with Hyundai Motor accounting for 6% of the index and the remaining 103 stocks with individual statistical weights below 4%.

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This ETF employs synthetic replication to track the underlying index by entering into a funded swap with counterparty Deutsche Bank AG. Investors’ cash is transferred to Deutsche Bank in exchange for the index performance (net of swap fees and other costs), while Deutsche Bank puts collateral in a segregated account pledged to the ETF. As of end-September 2013, the collateral, 121% of the ETF’s net asset value, consists mainly of publicly-listed equities, as well as roughly 30% government and corporate bonds. The collateral is marked to market on a daily basis and is subject to a margin ranging 100-120% of the exposure. Collateral is held by a third-party custodian; in this case State Street Bank Luxembourg S.A. The return from the swap assumes that all dividends paid by the underlying stocks, net of applicable taxes, are reinvested in the index. This ETF does not pay out dividends. The ETF will not enter into stock lending transactions.

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The ETF levies a total expense ratio (TER) of 0.65%. This is in-line with other Hong Kong and Singapore-listed ETFs tracking the MSCI Korea Index. Other costs potentially borne by the unitholder but not included in the TER include swap fees, bid-ask spreads, transaction costs on the infrequent occasions when the underlying index holdings change, and brokerage fees when buy and sell orders are placed for ETF shares.

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This ETF is domiciled in Luxembourg and is listed in Hong Kong, Singapore and various exchanges in Europe. There are a number of ETFs tracking the MSCI Korea Index, including the Lyxor ETF MSCI Korea (AO9, listed in Singapore, France, Germany, Italy and Switzerland, TER 0.65%), Kodex MSCI Korea ETF (A156080, listed in Korea, TER 0.37%), CS ETF (IE) on MSCI Korea (CSKR, listed in the UK, Germany, France, Italy and Switzerland, TER 0.65%), HSBC MSCI Korea ETF (HKOR, listed in the UK and Switzerland, TER 0.60%), iShares MSCI Korea (IKOR, listed in the UK, Netherlands, Germany, Italy and Switzerland, TER 0.74%), iShares MSCI South Korea (IKO, listed in Australia, TER 0.59%) and iShares MSCI South Korea Capped Index Fund (EWY, listed in the US, Mexico and Chile, TER 0.59%). Amongst these ETFs, this db-X ETF and the Lyxor ETF MSCI Korea employ synthetic replication while the others employ physical replication. In terms of AUM, the iShares ETF listed in the US is the largest at US$4.2bn, followed by its Europe version at US$746m, this db X-trackers ETF at US$189m and the Lyxor ETF at US$161m.

Investors seeking Korean equity market exposure may also consider ETFs that track alternative indices, such as the KOSPI 200 Index, which offers similar exposure but includes a higher number of constituent stocks.

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Über den Autor

Morningstar ETF Analysts  research hundreds of ETFs available to European investors. The Morningstar Rating for ETFs is based on a risk-adjusted performance measure.