Three ETFs to Play US, South Korea Trade Pact

The free-trade agreement between the United States and South Korea, which when executed will be the largest value of trade volume in the world since the North American Free Trade Agreement, should pave a path to opportunity for the iShares MSCI South Korea Index, the Consumer Discretionary Select Sector SODR and the iPath DJ-UBS Livestock TR Sub-Idx ETN.

More specifically, the amendments to the trade agreement include new steps to open up South Korea's auto market to U.S. producers by enabling 25,000 vehicles to enter South Korea based on U.S. safety standards. Furthermore, the U.S. is allowed to keep a 2.5% tariff on Korean-built cars for five more years, which eventually will be cut, and a 25% tariff on trucks until the eighth year. The duty will be eliminated in the 10th year of the pact.

From South Korea's perspective, the agreement calls for the Asian nation to maintain a 4% tariff on U.S. auto imports and to eliminate a 10% tariff on U.S. trucks. Additionally, the agreement phases out a 40% South Korean tariff on U.S. beef, making American beef more attractive in the growing nation.

At the end of the day, the U.S. International Trade Commission expects this agreement to boost U.S. exports to South Korea by $10 billion or more and slightly narrow South Korea's surplus with the U.S., while increasing U.S. imports from South Korea to $6.9 billion from $6.4 billion.

The ETFs likely to be influenced by this agreement include:

  • iShares MSCI South Korea Index boasts South Korean auto makers like Hyundai Motor and Kia Motors.
  • Consumer Discretionary Select Sector SPDR allocates 4.77% of its assets to Ford (F), the top-selling U.S. automaker in South Korea this year selling 3,100 units from January through October.
  • iPath DJ-UBS Livestock TR Sub-Idx ETN seeks to replicate the performance of the Dow Jones-UBS Livestock Subindex Total Return Index. The index allocates 59.27% of its assets to cattle, which is likely to see increased demand in South Korea as the lifting of the tariff is expected to make beef more attainable.

Grewal has no positions in the securities mentioned.

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