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When we hear about gaining exposure emerging markets, most people immediately think of the BRIC countries (NYSEARCA:BKF). That should make sense, right? Well, not really since the MSCI lists a total of 21 emerging market countries, while the Dow Jones lists 35 emerging market countries. The takeaway here is that there are more than four emerging market countries.

Still, we can’t blame the average investor for not knowing more since so much media hype over the years has been focused solely on Brazil, Russia, India, and China. In our personal opinion, the emerging market with substantial economic trade ties to all the big names which remains under the “media radar sweep” is South Korea.

There are three primary reasons why iShares South Korea ETF (NYSEARCA:EWY) is the “smarter” way to gain diversified exposure to emerging market gains without buying a hot BRIC name at a premium.

Economic Trade Dumping in China

South Korea is thriving economically by dumping billions of dollars worth of products into China, plain and simple. According to the National Bureau of Statistics China for 2008, South Korea exported $112.14B worth of trade to China while China, on the other hand, only exported $73.93B back. We can see that this looks eerily similar to the lopsided US-China trade relationship, but in reverse.

This makes South Korea the 4th largest trading partner with China. Take out Hong Kong (NYSEARCA:EWH), which for some reason is listed as a “separate economic entity” by the National Bureau of Statistics China, and South Korea becomes the 3rd largest trading partner in the world for China. The takeaway here is that South Korea has tapped into the fastest growing country in the world and is now reaping the benefits.

America Loves to Buy Cheap Products

America is still arguably the largest consumer market in the world. There is no question that America loves cheap, somewhat reliable products and South Korea is more than happy to satisfy the endless demand. For 2008, the United States Census Bureau listed US imports from South Korea at $48.9B, while only exporting back $38.8B.

In absolute terms, the US has much larger trading partners, including Canada and China, but in relative terms, there exists another trade imbalance which South Korea uses to its benefit as an emerging market. South Korea, as an emerging market, continues to be in a “long-term macro growth phase” due to trade imbalance relationships like these. We feel that South Korea can and will continue to grow a wider export imbalance with the largest consumer discretionary market in the world.

An Unnoticed Relationship of Economic Love

Any relationship must involve giving and taking, because that provides a healthy balance. Well, when it comes to the EU-South Korean trade relationship, South Korea insists on being more of a giver than taker. Currently, the EU makes up the largest portion of global GDP, according to the 2010 List by the CIA World Factbook, and South Korea has taken notice of the fact. On October 6th, 2010 the EU-South Korea Free Trade agreement was signed into approval in Brussels. This now makes South Korea the EU's 8th largest trade partner. Now, when looking at the trade balance between these entities for 2009, we find that South Korea exported $32B in goods to the EU while it only sent back $21.5B in product.

In addition, European companies are on average the largest foreign direct investors in South Korea and account for roughly 40% of the total FDI. There is little question that South Korea has definitely created a very “special” and lucrative relationship with the EU (ETFs: IEV or EWG).

Conclusion

While ETFs for China (NYSEARCA:FXI), Brazil (NYSEARCA:EWZ), and the overall emerging markets (NYSEARCA:EEM) are often referred to as the “best” names for investing, we find one common but crucial issue with them. All these hot names remain very dependent on one or two key trading partners to keep their current rates of growth. On the other hand, South Korea has created a diversified portfolio of large trade partners, holds a favorable trade relationship with each of them, and is likely to keep on providing sound growth with less risk relative to other emerging market options.

This is why we feel the South Korea ETF (EWY) is the quieter “alpha seeking operator” for emerging markets and is a sound BUY for now.

Source: South Korea: Emerging Market Exposure at a Discount