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September 13, 2016

Will South Korea ETFs Endure Samsung Slide?

Shares of Samsung (SAMSUNG ELECTRONIC KRW5000 (OTC: SSNLF)), the world's biggest smartphone maker, tumbled another 7 percent Monday after the South Korean conglomerate told users of the Galaxy Note 7 to stop using the phone because it can catch fire while charging.

That was after Samsung had lost nearly 11 percent over the previous two sessions, marking the stock's worst two-day skid in eight years.

Samsung And South Korea 

Give the iShares MSCI South Korea Index Fund(ETF) (NYSE: EWY) a second look. The largest exchange-traded fund tracking stocks in Asia's fourth-largest economy is weathering the Samsung storm with some aplomb. EWY is down just 2.3 percent over the past week and actually managed a modest gain on Monday.

This is noteworthy because EWY is afflicted with a problem that ETFs, in theory, should help investors avoid: single stock risk. As of September 9, EWY's Samsung allocation was 20.8 percent. No other stock commanded a weight of 3.6 percent at that time, according to iShares data.

ETFs And Weights

Funds with such massive weights to just one stock are not commonplace in the ETF business, but they are not impossible to find, either. In most instances, ETFs that expose investors to single stock risk are cap-weighted funds, meaning the company with the largest market value commands the largest percentage of the fund's weight.

This is not a problem exclusive to emerging markets ETFs. For example, Apple Inc. (NASDAQ: AAPL) maintains an out-sized percentage of the lineups in traditional cap-weighted U.S. technology ETFs. However, there are other examples of single-country emerging markets ETFs that leave investors vulnerable to either single stock or individual sector risk.

A Few Examples

For example, the iShares MSCI Taiwan Index (ETF) (NYSE: EWT) devotes nearly a quarter of its weight to Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE: TSM), more than triple its weight to its second-largest holding.

EWY, a normally docile ETF by emerging markets standards, illustrates the point that weighting methodology is an important consideration in the ETF evaluation process. Just look at the First Trust South Korea AlphaDEX Fund, First Trust Exchange Traded AlphaDEX Fund II (NYSE: FKO), against EWY.

The First Trust offering uses a combination of growth and value factors to arrive at its 51-stock lineup. Samsung is merely that ETF's ninth-largest holding at a weight of just under 3 percent. FKO is up 0.8 percent over the past week.

Investors are sticking by EWY. The ETF has not lost any money over the past week and month-to-date, it has added nearly $11.4 million in new assets, or more than quadruple FKO's current assets under management total.
© 2016 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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