Why Don't Japanese and Korean ETFs Track Local Indexes? (ETFs: EWJ, EWY)

Includes: EWJ, EWY
by: David Fry

While most investors wait for the Fed’s next act today, some are curious as to the poor tracking characteristics of Japanese ETF EWJ to indexes in Japan.

EWJ doesn’t track the Nikkei 225 or Topix indexes; instead it tracks the MSCI Japan Index. Getting contemporary data from MS without paying for it is difficult. In fact, if you looked to the AMEX yesterday, you’d have found (at least as of 5 PM EST) incorrect quotes for EWJ and the index.

Friday, EWJ gained 2.2% while the Nikkei for example rose 3.6%. Yesterday, EWJ lost .5% while the Nikkei rose .55%. A similar experience occurred with EWY (South Korea ETF) where EWY fell .37% while the Kospi 200 gained 2.25%. What gives? Out of time zone issues, for one, where the index is closed and the ETF is trading. The changing news cycle affects trading in the open market as sentiment may change. Currency issues (both the yen and the won were slightly lower yesterday) can also alter the value of the ETF versus the index.