EWY: Undervalued Tech-Forward Play

seekingalpha05-23

The iShares MSCI Korea ETF is a tech-heavy fund with over $5 billion in assets, making it the largest South Korea-focused ETF.EWY is heavily weighted towards tech giants like Samsung and SK Hynix, and...

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As of writing, the fund has over $5B in assets. This is significantly larger than any other South Korea-focused ETF. The fund has delivered +3.38% on a trailing one-year basis, suffering from secondary impacts from the global slowdown. However, I think EWY is poised for some upside and the fund is trading at very attractive valuation multiples. I'm currently rating EWY as a buy. South Korea is the fourth largest economy in Asia behind India, Japan, and China. It has experienced significant growth, averaging an annual Real GDP expansion of 5.7% between the years 1980-2023. It is a vital export economy, supplying the world with semi-conductors, other tech products, as well as other critical industries such as automobiles and automotive parts. The country has experienced an uneven recovery since the COVID period. While exports grew for a sixth consecutive month in March, consumer demand has remained suppressed by the higher interest rate regime. The headline story most pertinent to the South Korean economy is the government's recent announcement of a near $7 billion dollar investment in the AI and semi-conductor industry, as the global race to strengthen local supply chains accelerates. Semi-conductor chips are an essential South Korean export, which amounted to $11.7B in March 2024. The government's investment demonstrates a commitment to retaining an edge in this extremely competitive space. Concentration abound in fund's holdings As mentioned above, this fund tilts strongly towards tech, with over 40% of assets in the sector. There is also a notable allocation to financials and industrials. Seeking Alpha From an individual holdings' perspective, the fund is also extremely concentrated. The top 10 holdings of the fund total retain ~51% of the ETF's total assets, and just under a quarter of the fund is allocated to electronics giant Samsung (OTCPK:SSNLF). Much is happening in the global chip wars as AI evolves, and Samsung has responded in-kind. Most recently, the company announced the appointment of a new chief of the chips division to double-down on its ability to compete in the future. While Samsung is the resident leader in certain chip categories, it lags in HBM (high-bandwidth memory) market-share, which is essential for AI applications. Interestingly, the leader in this space is also a South Korea domiciled firm, and the second-largest individual holding in EWY, SK Hynix. However, at the moment there is a massive ~15% differential in their weightings. If Samsung is unable to gain more market share back from Hynix, this could have a negative impact on EWY. Seeking Alpha AI exuberance evident in flows, but there's value in EWY EWY's recent flow pattern has been an interesting thing to behold. After suffering major outflows in the COVID era, where the fund saw net outflows of upwards of $2B, the rebound began in earnest in 2022. EWY has recorded net inflows of a whopping $1.3B in the first 4 months of 2024. Despite the surge in interest in EWY, its valuation is currently priced attractively. The tech-forward fund is trading at multiples more akin to value than growth, offering a P/B ratio of 1, with 13x earnings. ETF.com Decent performance, volatility is present When looking at other single country ETFs in the region, EWY has emerged as a strong contender in developed Asia. It has delivered 235% in return since its inception, but it is evident in the graph below that the fund has experienced heightened volatility relative to both Singapore and Japan. Data by YCharts Taking a closer look at the volatility profile of the fund, we do see that volatility is significantly heightened relative to regional peers. EWY has a 30-day rolling volatility of ~24% compared with ~15% for Singapore and Japan. This is a significant difference, in particular for a developed Asian economy. As such, I am keenly aware of the potential risk EWY could introduce into an investment portfolio. Data by YCharts Conclusion  The iShares MSCI Korea ETF is a tech-heavy ETF with over $5 billion in assets, making it the largest South Korea-focused ETF. It invests in 107 different South Korean equities, with a significant chunk dedicated to tech, especially electronics giants and chip manufacturers Samsung and SK Hynix. EWY is trading at cheap valuation multiples, making it a more attractive buy than other tech-forward ETFs. The South Korean government’s recent $7 billion investment in AI and semiconductors is a potential tailwind for the fund. This ETF has seen impressive inflows in 2024 and offers value despite higher volatility compared to regional peers. For these reasons, I currently rate EWY as a buy.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2437249321"}