When most Australian investors buy into a simple ASX index fund, they normally do so for a simple reason. Index funds are designed for passive investment over long periods of time, making them a perfect fit for investors who don't want to do stock picking themselves, but still wish to build long-term wealth using the share market.
Index funds promise simplicity and passivity, at the expense of achieving the kinds of millionaire-making returns that motivate most active stock pickers.
Until recently, that was a pretty spot-on assessment to have come to. But one ASX index fund has turned it on its head.
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Korean stocks on the ASX
That would be the iShares MSCI South Korea ETF (ASX: IKO). Just as an ASX index fund like the iShares Core S&P/ASX 200 ETF (ASX: IOZ) tracks the S&P/ASX 200 Index (ASX: XJO), representing the largest 200 stocks on the Australian share market, IKO follows the MSCI Korea 25/50 Index. This index represents the best of the Korean public markets, and currently tracks about 80 South Korean companies.
Just as the ASX 200 represents a slice of Australian business, this index offers up the cream of Korean capitalism. Until recently, most ASX investors wouldn't have batted an eye at this. After all, most advanced economies around the world have indexes that track their stock market's performances. Most offer similar returns that average in the high single-digits over long periods of time.
However, the iShares MSCI South Korea ETF has put that adage to shame. And that's a gross understatement.
Exactly a year ago, IKO units were going for $97.71 each. Today, those same units are worth $309.92 at the time of writing. That's up an incredible 217.2% over the past 12 months. You can add another 1.46% on top of that to account for this ASX index fund's dividend distributions too, if you'd like.
How has this ASX index fund returned more than 200% in a year?
So how on earth does a simple ASX index fund deliver a return like that? For comparison, the iShares ASX 200 ETF has risen by 3.38% over the same period.
Well, it seems a perfect storm has hit the Korean markets. The Korean stock exchange is top-heavy. The two largest stocks in the IKO ETF are SK Hynix Inc, and Samsung Electronics Ltd. These two companies alone currently account for 23.8% and 21.9% of this index fund's weighted portfolio, respectively. The next-most significant holding only contributes 3.52%.
As it happens, SK Hynix and Samsung are both leaders in what is arguably the hottest industry in the world right now – chipmaking. As the boom in artificial intelligence (AI) investment has taken off over recent years, the fortunes of these beneficiaries have soared. Samsung shares have (as of the time of writing) rocketed by 512% since this time last year. SK Hygenix is up more than 1,000%.
As such, IKO owners have these two names to mostly thank for their newfound wealth.
It's hard to say what's next for this high-flying ASX index fund. Before you get FOMO and buy in though, it's worth pointing out that, as of 30 April, IKO's long-term average is 8.58% per annum since its inception in 2000. Only time will tell if 'this time it's different'.
