ETF Expert

If you like value investing, the iShares South Korea Fund (EWY) gives you one of the lowest price-to-earnings growth ratios around. And Warren Buffet owns roughly 5% of South Korea’s 2nd largest company, steel-producing giant, Posco.

If you like growth, South Korea’s Samsung now has a larger market cap than rival Sony. What’s more, you’re getting emerging market-like GDP from a highly developed and technologically advanced Asian Tiger (i.e., South Korea, Taiwan, Hong Kong, Singapore).

Yet, if there were nothing but upside, it wouldn’t be "investing." So why would an investor be afraid to invest in South Korea (EWY) alone?

For starters, the iShares South Korea Fund (EWY) is not particularly well-diversified. The top 5 holdings account for nearly 50% of the exchange-traded fund’s direction. Moreover, roughly 25% of the fund’s movement depends on the successes and the failures of Samsung.

(Sure, the diversified electronics manufacturer of flat screens and mobile phones has been on fire… but tech is a tough place to stay in the lead.)

Also, the country’s economic well-being appears to be largely dependent on the high-flying infrastructure stocks. Companies like Posco, Korea Electric Power (KEPCO) and SK Telecom remain hot during global economic expansion. However, couldn’t a global contraction rock the infrastructure foundation?

Last, but certainly not least, have we entirely discounted the threat of North Korea? Are they out of the Axis of Evil… or has the U.S. government turned all of its attention to Iran and Iraq now? (Note: Regardless of one’s polictical feelings, this is a web log about investing. And investors most certainly take political risk very seriously.)

One year ago, investors were talking about Kim Jong’s missile tests and nuclear brinkmanship in defiance of U.S. warnings. Today… the investing public may just be a little bit too optimistic (or naive) about Kim Jong’s more recent cooperation. After all, the man’s number one priority is the same as that of Iran’s Ahmadinejad: nuclear weaponry.

So is there a better way to invest in South Korea? One might argue that you’re getting better diversification through the iShares Emerging Market Fund (EEM). It maintains a 15% weighting to South Korean stock assets. The chart below clearly shows that… at least for the last 2 years… diversifying away from the single-country risk of South Korea yielded very similar results.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.