Should Investors Worry About Korean ETFs In 2017?

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Includes: DBKO, DXKW, EWY, KORU
by: Zacks Funds

North Korean leader Kim Jong Un stated recently that the country was close to testing an intercontinental ballistic missile. In response, U.S. President-elect Donald Trump took to Twitter and stated that "North Korea just stated that it is in the final stages of developing a nuclear weapon capable of reaching parts of the U.S. It won't happen!" Meanwhile several experts are also of the opinion that North Korea is years away from being able to deliver a nuclear warhead to the U.S.

However, considering that North Korea did perform two nuclear tests in 2016, these threats cannot be disregarded. Many believe that the Obama administration's policy of "strategic patience" led to the rapid development of North Korea's arsenal and acceleration of its nuclear and ballistic missile program. North Korea's missile power stands to hamper global peace and stability with South Korea at the risk of being the worst hit.

South Korean Economy to Take a Hit

Despite being Asia's fourth-largest economy, South Korea continues to face a number of headwinds that mar its growth prospects. The country's fading industrial competitiveness, slowing corporate earnings and poor shareholder returns have weighed on the markets for quite some time now.

In December, the South Korean government lowered its GDP forecast for 2017 owing to weak domestic demand and unimpressive job growth. It now expects the economy to grow 2.6% next year, much below its previous projection of 3% and Bank of Korea's expectation of 2.8%.

Meanwhile, North Korea's military aggressiveness is sure to heighten the tension between the countries, as attempts to improve dialogue are expected to die down along their heavily fortified borders.

North Korea's rising arsenal power would intensify the geopolitical risks in the region, which does not bode well for global investors. Most of the South Korea-focused ETFs plunged following North Korea's nuclear test in September. These are expected to be in focus in the following trading sessions as well.

ETFs in Focus

iShares MSCI South Korea Capped ETF (NYSEARCA:EWY) - The fund tracks the MSCI Korea 25/50 Index and has a holding of 109 stocks. The fund's expense ratio is 0.62% while its dividend yield is 1.21%. EWY has managed to draw $2.8 billion in assets under management (AUM).

Direxion Daily South Korea Bull 3X Shares ETF (NYSEARCA:KORU) - The fund seeks to deliver 300% of the performance of the MSCI Korea 25-50 Index. The fund's expense ratio is 0.95%. KORU has managed to pull in $3.6 million in AUM.

WisdomTree Korea Hedged Equity Fund (NASDAQ:DXKW) - The fund tracks the WisdomTree Korea Hedged Equity Index. The fund's expense ratio is 0.58%. DXKW has managed to rake in $9.9 million in AUM.

Deutsche X-trackers MSCI South Korea Hedged Equity ETF (NYSEARCA:DBKO) - The fund tracks the MSCI Korea 25/50 US Dollar Hedged Index and has 107 stocks. The fund's expense ratio is 0.58%. DBKO has managed to attract $29.6 million in AUM.

Meanwhile, North Korea's cyber-attacks have become more advanced and frequent. Reportedly, the country was behind the hacking of Sony Pictures in 2014 and the breach of South Korean civilian and military institutions that reportedly involved obtaining blueprints for components of the U.S.-made F-15 fighter jet.

Such data breaches drive the need for cyber safety measures, thereby increasing demand for the services offered by security companies. Increased demand for security-related products act as tailwinds for ETFs like the PureFunds ISE Cyber Security ETF (NYSEARCA:HACK) and the First Trust NASDAQ Cybersecurity ETF (NASDAQ:CIBR).

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