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Are Korean ETFs In Trouble?

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Given the ongoing trouble in Europe and the U.S., many Asian markets have slid under the radar in recent weeks. However, stocks in these countries have been negatively impacted by developed market events as well, largely thanks to the role as riskier investment picks and as well as the heavy dependence that many of these economies have on exports to industrialized nations.

While this trend has hit many emerging nations, it has also led to losses in many of the more developed countries in the region too. In particular, trouble has begun to brew in the important quasi developed market of South Korea (also see Time to Buy the Singapore ETFs).

The small North Asian country is often a popular proxy for traders on the emerging Asian world as the nation has relatively deep and liquid markets that many Southeast Asian nations cannot match. Furthermore, there is also a great deal of political risk in the region thanks to the volatile North Korean neighbor right next door, another factor which adds to the general volatility of the market.

Given these traditional worries and demand for trading in the Korean market, the country’s equities have been heavily impacted by recent global events. Additionally, local concerns are playing a huge role in the country’s misfortune as of late as well (also see Southeast Asia ETF Investing 101).

Although unemployment rates are flat at an impressive 3.4% for April, some concerns are building over both the interest rate policy for the Bank of Korea in the near term, as well as the impact of a slowdown in China and uncertainty in the U.S. markets. Together, these two nations account for over one-third of the total exports from Korea, suggesting that weakness in these markets will heavily impact the small country’s economy.

Thanks to these local pressures and the heavy dependence of Korea on international markets, many equities in the country have been under pressure as of late. In fact, the market, as represented by the iShares MSCI South Korea Index Fund (EWY - Free Report) , was up solidly in the early part of the year but is now in danger of falling back to break even in 2012.

As you can see in the chart above with the 50-Day moving average, EWY has begun to break lower, and is in danger of reaching six month lows at some point in the near future. Unfortunately, the situation in the Korean market is even worse in the small cap space, as represented by the IndexIQ South Korea Small Cap ETF (SKOR - Free Report) .

This product which only focuses on the bottom segment of the Korean market, has been even more impacted by recent events in the nation and the general risk-off trade hitting the country. SKOR is actually down about 22.3% over the past six months compared to a 2.5% loss in EWY in the same time period.

Even more troubling is the intense selling pressure which has hit both products in May. EWY has lost about 10% of its value since the start of May while SKOR has declined by about 8% during the same time period (see Frontier Market ETF Investing 101).

Korean ETF Outlook

Yet despite these headwinds, either of these ETFs could make for reasonable selections at this time, assuming that China can avoid a hard landing and that the U.S. can continue to muddle through its current economic slow period. Both EWY and SKOR have interesting sector breakdowns which skews the funds towards tech and consumer cyclical stocks. With the exception of some Taiwanese funds, this is far different than many other products targeting the Asian market (read Five Great Global ETFs For Complete Equity Exposure).

Instead, many other Asian ETFs have a heavy focus on banking or energy firms with these sectors often combining to comprise more than 50% of the portfolio in some cases (see EWS, FXI, or EWH as examples of this phenomenon). While this may be the reason for some of the Korean ETFs’ underperformance as of late, it also suggests that Korean funds may be better positioned for the long haul as well.

Given this, now may be an interesting time to consider adding Korean ETFs to a portfolio. The products have been beaten down significantly in May and have lost far more than similar products in the region in recent time frames.

Still, Korean stocks have decent upside from these levels and since many of the portfolios are targeted at other sectors than what similar Asian ETFs are focused on. Thanks to this, even if Korean ETFs remain weak at this time, they could be an interesting play from a diversification perspective adding valuable foreign securities in consumer and technology sectors to any portfolio (read Inside The Vietnam ETF).

The only question is whether investors want the large cap focused EWY or the small cap SKOR. While both have a similar sector focus, there are some key differences between the two.

EWY is likely to be a better pick for stability and volume, but SKOR could be the choice for those seeking a high risk higher reward play. Either way, a Korean ETF pick may be an interesting move in the current market environment, especially when compared to their more concentrated counterparts in the region.

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