South Korea In The Middle Of A War?

By: ispeculatornew
Date posted: 10.08.2013 (3:00 am) | Write a Comment  (2 Comments)

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ks-lgflagOne of the best aspects of trading ETF’s is how simple things become. Want to buy a bond index? You don’t need to find a dozen bonds that have a strong correlation with the index. Instead, you can simply look for an ETF that tracks the index.

Sometimes though, knowing what index an ETF tracks is not enough. One of the bigger and more known ETF’s is the iShares Emerging Markets ETF (EEM) which tracks the MSCI Emerging Markets Index. Its biggest competitor had been Vanguard’s own Emerging markets ETF, VWO. Then, a few months ago, Vanguard announced it would be switching the index that its ETF was tracking. Instead of tracking the MSCI Emerging Markets index, it would switch to the comparable index offered by FTSE (a MSCI competitor). On the surface, this did not mean much. VWO’s name would change from:

Vanguard MSCI Emerging Markets

To:

Vanguard FTSE Emerging Markets

The main assumption was that it would be cheaper for Vanguard which could then reduce its annual fees. One big difference that attracted some attention at the time was South Korea. Specifically, MSCI considers it an emerging economy while FTSE does not. That is a huge difference. South Korea is over 15% of the MSCI index and is missing from the FTSE one which has been a big problem for Vanguard in the past few months as South Korea continues to do well. That has translated into underperformance by the Vanguard ETF and it very well could continue to be the case.

vwoeem

EEM, which had lost ground in terms of assets under management because of its higher fees has now regained its momentum as more and more investors try to move to what they perceive as the “stronger ETF”. This is a great example where it’s not only about fees but also about understanding the differences between 2 similar indexes.

Is South Korea An Emerging Or Developed Economy?

It’s a very debatable point and you can read more about it here:

http://qz.com/124190/investors-fleeing-emerging-markets-are-still-showing-the-love-to-south-korea/

If you’d like to invest directly into South Korea, you can trade the iShares South Korea Capped ETF directly here:

EWY

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2 Comments

  1. Comment by S. B. — October 13, 2013 @ 10:37 pm

    I agree the classification is debatable, but based on most accounts, there is still a LOT of growth left in South Korea. Many forecasts show that within a few decades, South Korea will be near the very top in per capita income. Personally, I don’t think this move by Vanguard was very well advised.

  2. Comment by IS — October 14, 2013 @ 8:21 pm

    @S.B. – No doubt about it, it’s looking like a poor decision right now

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