Accessing South Korea: Country or Regional ETF?

I’ve traveled this road before. Should you purchase the “best-in-breed” stock from its industry or its respective sector of the economy? Should you purchase a single country ETF or would you be better served by the diversification of a regional representative?

In several previous features, I demonstrated that iShares Latin America (ILF) was more beneficial over time than country picking. The same held true for most sectors over stock picking.

Now Morningstar is running an exploratory piece on how to capitalize on South Korea growth. Normally, I might not take notice, since one is likely to get bland statements such as “…the South Korea market is well positioned to benefit from a global economic recovery.”

Yet I took notice today for 2 reasons. First, Morningstar currently has its worst possible rating (1 star out of 5) on the iShares MSCI South Korea Fund (EWY). And still, the anonymous author speaks in glowing, albeit measured, terms about EWY as a satellite holding. (Someone over there needs to get the writers and star raters on the same page!)

Second, while South Korea is clearly a critical component of the Asia growth story, its success depends largely on China. In fact, all Asian neighbors have strong economic ties to China. Nevertheless, the idea that EWY will outperform pan-Asia funds like iShares Asia 50 Index (AIA) or SPDR Emerging Asia (GMF) isn’t grounded in reality.

The reason is as simple as understanding what’s inside the iShares MSCI South Korea Index (EWY). Specifically, 20% of EWY is in a single company, Samsung. If Samsung is firing on all cylinders, then its conceivable that EWY could out-hustle Asian indexes and vice versa.

But why risk it? If your intent is to access South Korea… but you are wary off too much single-stock exposure and/or proximity to North Korea… there are solid alternatives. The iShares MSCI Asia ex-Japan Index (AAXJ) is worth looking at with a 20% exposure to the country, South Korea.

Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.