MW South Korea ETFs struggle despite country showing 'resiliency' after martial law
By Christine Idzelis
Investors are also watching France after its government fell this week
Hello! This week's ETF Wrap looks at what the recent political turmoil in South Korea and France means for investors.
Please send feedback and tips to christine.idzelis@marketwatch.com or isabel.wang@marketwatch.com. You can also follow me on X at @cidzelis and find me on LinkedIn. Isabel Wang is at @Isabelxwang.
Sign up here for our weekly ETF Wrap.
It's been a head-spinning week for exchange-traded-fund investors monitoring geopolitical risks to stocks in their portfolios.
South Korean President Yoon Suk Yeol declared martial law on Dec. 3, accusing his political opposition of sympathizing with North Korea and sparking a selloff in the country's stocks.
Buying the drop in South Korean equities spurred by the martial-law declaration seems fine to Marko Papic, chief strategist at BCA Research and author of "Geopolitical Alpha: An Investment Framework for Predicting the Future." He said in a phone interview that "geopolitical events rarely have staying power," adding that although it was a "very big" negative surprise that the president of South Korea effectively tried "to do a coup against his own parliament," the move failed.
Yoon's "own party, right away, as it was happening, said it was unconstitutional," said Papic. "The guy's done. They're calling for his impeachment."
The iShares MSCI South Korea ETF EWY, Franklin FTSE South Korea ETF FLKR and Matthews Korea Active ETF MKOR all dropped on Dec. 3, ending the day sharply lower even after bouncing from the initial selloff early in the trading session, according to FactSet data. Shares of all three ETFs fell Thursday, deepening their losses this week and year to date.
Still, South Korea's democracy demonstrated "resiliency" at a time when incumbent governments are being challenged globally, according to Papic.
"The response from both government and civil society" showed South Korea's "checks and balances and strength of institutions are strong," said Perth Tolle, founder of Life + Liberty Indexes, in an email to MarketWatch. Tolle's Freedom 100 Emerging Markets ETF FRDM - which tracks an index of emerging-market stocks based on personal- and economic-freedom metrics and excludes authoritarian regimes - currently has a 14% weight to South Korea.
"Our methodology results in higher exposure to countries with stronger institutions, rule of law, and checks and balances," said Tolle. South Korea provided "a good test of all those things, and so far, the outcome appears consistent with their allocation in the FRDM index strategy," she said, referring to the ticker of the Freedom 100 Emerging Markets ETF.
Shares of the fund are up 3.8% this week through Thursday, bringing its year-to-date gain to 5.2%, according to FactSet data. By contrast, the iShares MSCI South Korea ETF has plunged more than 15% so far in 2024.
Although South Korea is often categorized as an emerging market when it comes to investing indexes, that label is a "borderline" case, as the country's market is similar to Japan, said Jason Hsu, founder and chief investment officer of Rayliant Global Advisors, in a phone interview.
The actively managed Rayliant Quantamental Emerging Market ex-China Equity ETF RAYE has South Korean company Samsung Electronics Co. (KR:005930) in its portfolio as a core holding, said Hsu. Beyond making televisions, Samsung manufactures semiconductor components, he noted.
Read: Samsung Electronics Rallies After $7 Billion Buyback Plan
Shares of the Rayliant Quantamental Emerging Market ex-China Equity ETF have climbed almost 10.7% this year through Thursday, FactSet data show.
In Hsu's view, the sharp drop in South Korean stocks on Dec. 3, when markets "freaked out and sold" on the surprise declaration of martial law, presented a buying opportunity. The country changes presidents "quite regularly," and when they exit, often they don't "go quietly," he said.
The president declaring martial law may have been just "a slightly different spin on not wanting to leave" after becoming unpopular, according to Hsu. But "there was never any real risk that you got this military government coup," he said, because the South Korean president is "democratically elected and doesn't control the military."
French government collapses
Meanwhile, the French government fell on Wednesday after lawmakers in France voted to oust Prime Minister Michel Barnier. The no-confidence vote left French President Emmanuel Macron needing to appoint a new prime minister.
While the unfolding of events in South Korea seemed a bit "comical" to Papic, he said those in France are "more serious." Investors might want to wait for the new government to be created before buying French stocks, as the situation will then be "pretty much over no matter who comes to power," he said.
Macron announced Thursday that he would stay in office until the end of his term and that he will name a new prime minister within days of the ousted Barnier's resignation, according to an Associated Press report. The iShares MSCI France ETF EWQ is up 1.2% this week through Thursday, but remains down in 2024 with a 6.3% decline year to date, FactSet data show.
Stick with U.S. stocks?
ETF investors clearly favored U.S. equities over international stocks last month, according to Matthew Bartolini, head of Americas ETF research at State Street Global Advisors. He found that 97% of November's equity flows into U.S.-listed ETFs went into funds targeting U.S. stocks.
"Everyone was stockpiling U.S. exposures, given the strong market sentiment" following the election of Donald Trump as president, as well as the country's stronger economy and stock market compared to the rest of the world, Bartolini said in a phone interview.
Check out: How Treasury yields are driving whether U.S. stocks beat the rest of the world
Strong momentum in the U.S. stock market is fueled in part by expected tax cuts under President-elect Trump, said Papic. That, along with the uncertainty surrounding tariffs under the incoming White House administration, makes it more difficult for people seeking to invest internationally over the next six months, according to his thinking. The "powerful consensus view" is more "upside" for U.S. equities, he said.
As usual, here's your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.
The good...
Top performers %Performance ARK Next Generation Internet ETF 6.9 ARK Innovation ETF 6.4 VanEck Semiconductor ETF 6.0 ARK Fintech Innovation ETF 3.8 ARK Genomic Revolution ETF 2.8 Source: FactSet data through Dec. 4. Start date Nov. 28. Excludes ETNs and leveraged products. Includes NYSE-, Nasdaq- and Cboe-traded ETFs of $500 million or greater.
...and the bad
Bottom performers %Performance VanEck Uranium and Nuclear ETF -1.9 VanEck Oil Services ETF -1.3 VanEck Preferred Securities ex Financials ETF -0.8 VanEck Agribusiness ETF -0.8 VanEck J.P. Morgan EM Local Currency Bond ETF -0.6 Source: FactSet data
New ETFs
-- MFS said Thursday that it launched the firm's first actively managed exchange-traded funds, including the MFS Active Value ETF MFSV, MFS Active Growth ETF MFSG, MFS Active International ETF MFSI, MFS Active Core Plus Bond ETF MFSB and MFS Active Intermediate Muni Bond ETF MFSM.
-- BlackRock said Dec. 4 that it listed the iShares International Country Rotation Active ETF CORO.
-- Invesco announced on Dec. 4 that it launched the Invesco Top QQQ ETF QBIG and Invesco QQQ Low Volatility ETF QQLV to provide varied exposure to companies in the Nasdaq-100 index NDX.
-- Simplify Asset Management announced on Dec. 3 the launch of the Simplify Gold Strategy PLUS Income ETF YGLD and Simplify US Small Cap PLUS Income ETF SCY.
Weekly ETF reads
-- Korea ETFs drop sharply after South Korean president declares martial law (MarketWatch)
-- France ETF holds on to gains after French government falls (MarketWatch)
-- Bitcoin Euphoria Threatens to Break These ETFs (Wall Street Journal)
-- The Firm Behind the First Mutual Fund Is Launching Its Debut ETF (Bloomberg)
-- Apollo Starts Trading Blue-Chip Debt to Build Private-Credit ETF (Bloomberg)
-Christine Idzelis
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 05, 2024 18:57 ET (23:57 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
Comments