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Why Korea ETF Investors Will Pay for Samsung's Mistake

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Shares of the noted smartphone maker Samsung dropped 7% on September 12 as the company advised not to use and charge its high-end Galaxy Note 7 phone as they can turn inflammable while charging. The U.S. Consumer Product Safety Commission also issued a warning and told that it is figuring out a formal recall with Samsung.

Almost 24 out of a million phones have faulty production. The South Korean tech behemoth called for a global recall program as it has already shipped 2.5 million of this product. Apart from the product recall, offers of trade-ins and gift cards were also made to U.S. customers.

Thanks to the recall order and caution from U.S. regulators, shares of Samsung Electronics Co. Ltd. recorded its largest single-day plunge in prices on September 12. Samsung lost about 15.9 trillion of South Korean won in value.  

How Harmful the Impact Is?

A group of analysts is of the view that the recall will meaningfully weigh on Galaxy Note 7 sales and can have a long-lasting negative impact on the company’s brand image. It may also hamper the company’s prominent emergence in the smartphone market. The recalls also delayed launches of the device in regions like Europe.

Research house Nomura slashed its forecast for Samsung‘s third-quarter mobile operating profit by 900 billion won to 3.1 trillion won responding to the Note 7 recall. Analysts are of view that even after the recalls and discounts offered, Samsung will likely take time to regain consumers’ confidence.

In fact, Samsung will likely fall behind Apple as the latter unveiled iPhone 7 last week. With this, users may incline toward high-end Apple products and cause Samsung to lose its market share to Apple. Investors should note that in the second quarter of 2016, Samsung had the highest market share (22.4%) in the smartphone segment followed by Apple (11.8%), as per satista.com (read: Should You Invest in Apple ETFs Following Buffett?).

However, there is also a bullish cohort, which expects that “the stock to remain little changed from current levels in the near term. And with more shares left in its buyback program, which is expected to be completed by the end of October, and an inexpensive valuation, the downside is likely to be limited.”

Impact on the ETF World

The highest impact will be on South Korean ETFs as several of South Korean ETFs invest over 20% of the portfolio in Samsung (see all Asia-Pacific (Developed) ETFs here).

iShares MSCI South Korea Capped ETF (EWY - Free Report) puts 20.84% weight in Samsung – its top holding (read: 4 Country ETFs to Gain from Oil Price Crash).

Deutsche X-trackers MSCI South Korea Hedged Equity ETF has 20.86% exposure in Samsung – its top holding.

SPDR MSCI South Korea Quality Mix ETF has 18.34% exposure in Samsung – its top holding.

WisdomTree Korea Hedged Equity Fund has about 11.1% weight in Samsung Electronics.

Among the other ETFs, iShares Asia 50 ETF (AIA - Free Report) has about 11.6% weight in Samsung, PowerShares FTSE RAFI Asia Pacific ex-Japan Portfolio ETF puts about7.5% weight in Samsung and WisdomTree Strong Dollar Emerging Markets Equity Fund has about 6.12% exposure to the stock (see broad emerging market ETFs here).

All the afore-mentioned ETFs will be in focus over the coming days on Samsung’s recall issue.

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