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South Korea: Developed or Emerging?

Due to a lack of consensus on the issue, many foreign large-blend and emerging-markets funds are underweight South Korean firms.

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Patty Oey: IShares MSCI South Korea is a fund to consider for those who like to take a proactive approach in managing their international-equity allocation. South Korea is home to global heavyweights such as Samsung Electronics and automakers, Hyundai and Kia, as well as major exporters in the electronics, technology, consumer, and machinery industries.

Interestingly, within the asset management industry, there isn't any consensus on whether South Korea should be classified as a developed market or as an emerging market. So, actually, as a result, the average foreign large-blend fund as well as the average emerging-markets fund is actually underweight South Korea. So this fund can be used to top up an underweight exposure to South Korea.

This ETF tracks a market cap-weighted index, and like many single-country ETFs, this fund is quite concentrated. Its largest holding is Samsung Electronics at 20%, and this company's main business lines include handsets and memory chips. The stock recently fell about 8% over the last month on concerns of an increase in competitive pressures on both the high end and low end of the handset market. So, perhaps, the current challenging environment is already priced into the shares.

But there is a catalyst on the horizon. Samsung Electronics is part of a complicated, family-owned conglomerate, and this conglomerate is about to embark on a restructuring process. This could result in a more streamlined ownership structure which will probably better help align the interest of the family owners as well as the minority shareholders, and may actually help alleviate the perennial discount Samsung tends to trade at relative to its global peers.

As for the fund's other major big holdings, a lot of them are exporters and they're probably actually seeing their competitive pressures ebb. A lot of these exporters were competing against their Japanese peers who were benefiting from a rapidly declining yen in 2013. But the yen has since stabilized starting in early 2014.

Overall, given the export orientation in many of this fund's largest holdings, this fund has a very strong cyclical tilt. So, it is not a fund for those with a bearish medium-term global growth outlook.

Patricia Oey has a position in the following securities mentioned above: EWY. Find out about Morningstar’s editorial policies.