A divergence in index construction has opened a 16-percentage-point performance gap between the two largest emerging-market exchange-traded funds, with the iShares fund benefiting from a 75% rally in South Korea’s stock market this year.
"Korea meets the core characteristics investors typically associate with developed markets—including economic maturity, scale, and liquidity—and several major index providers already classify it that way,” said Carole Okigbo, global head of ETF capital markets and broker and index relations at Vanguard.
The $150 billion iShares Core MSCI Emerging Markets ETF (IEMG) has gained 38% over the past 12 months, while the $119 billion Vanguard FTSE Emerging Markets ETF (VWO) is up 22%. The difference is South Korea, which is included in the MSCI index tracked by iShares but excluded from the FTSE index that Vanguard follows. The Korean market now makes up about 20% of the iShares ETF, fueled by massive gains in memory chip makers Samsung (005930.KS) and SK Hynix (000660.KS), whose shares are up fivefold and eightfold in the past year, respectively.
The choice for investors hinges on their conviction in the semiconductor-led rally, which is showing signs of strain. With Nvidia’s pivotal earnings report due this week, the market is questioning if the AI-driven boom has run too far. The decision to include or exclude South Korea effectively makes choosing between the two ETFs a concentrated bet on the future of memory chip demand and valuations.
A Concentrated Bet
While the Kospi index’s 75% surge this year has been remarkable, signs of froth are building, prompting some investors to exercise caution. “This is a party you want to enjoy while staying near the exit,” said Mo Young, a portfolio manager at RootN Global Investors in Seoul, speaking to Bloomberg.
The rally’s narrow leadership is a primary concern. Samsung and SK Hynix have accounted for two-thirds of the Kospi’s advance. Market breadth has weakened, with just 33% of the benchmark’s stocks trading above their 50-day average, down from 70% three weeks ago, according to Bloomberg data. This suggests the gains are highly concentrated and not reflective of the broader Korean economy. Valuations in non-tech sectors are also stretched, with materials firms trading at nearly 60 times forward earnings.
Global Headwinds Pressure Tech Rally
The unease is compounded by a deteriorating global market environment. A global bond rout, driven by inflation fears stoked by oil prices holding above $110 a barrel, is pressuring equity valuations worldwide. Yields on 30-year U.S. Treasuries recently climbed to 5.2%, a level last seen in 2007, while the benchmark 10-year yield has pushed past 4.6%.
This sharp rise in borrowing costs has hit technology and other growth-oriented stocks hard. South Korea’s Kospi dropped nearly 5% on Tuesday, tracking losses in U.S. tech peers and marking its worst performance in Asia. The selloff comes as investors globally take profits ahead of Nvidia’s (NVDA) earnings on Wednesday, which is seen as a critical test for the entire AI-related trade that has propped up markets this year.
This article is for informational purposes only and does not constitute investment advice.
