Korea ETF Navigates Political Storm

The fate of a Korea ETF hinges on the political resolution in the sinking of a South Korean patrol boat by North Korea.
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NEW YORK (TheStreet) -- Political tensions in South Korea have hampered the rise in the iShares MSCI Korea Index(EWY) - Get Report, but the fund continues to relatively outperform other country ETFs. For investors bullish on the country and its economy, it may be a good time to gain exposure.

Some weeks ago on my Real Money

blog

on my RealMoney blog, I said EWY would continue to trade sideways as long as uncertainties continue in the aftermath of the tragic sinking of a navy patrol boat.

At that time, there was speculation over how the ship sank, but now the ship is believed to have been sunk by a torpedo launched by North Korea and South Korean President Lee Myung-bak said there will be retaliatory action.

This is an outcome few want to see since an escalation of the war would be disastrous for South Korea's economy. Even a successful campaign against North Korea would be extremely costly from an economic standpoint, due to the cost of reunifying the two countries.

EWY has traded sideways since the incident, despite optimistic reports concerning the present state of the country's economy.

For instance, the two largest Korean automakers have been doing well lately. April vehicle sales for Hyundai Motors increased by 28% in April from a year earlier on the strength of overseas sales as the company exported about five times as many cars as it sold domestically.

Kia Motors also had a good April. Its sales increased 49% last month compared to a year earlier with much of their sales growth attributed to better sales abroad. The company shipped about three times as many cars overseas as it sold domestically.

The domestic consumer base is also showing signs of improvement, as domestic auto sales increased in April by about 33% from a year earlier for Kia and 17% for Hyundai.

Earnings for Samsung in the first quarter were also very strong. The company beat estimates when it reported a $3.95 billion operating profit in the first quarter. The company, which accounts for 18.7% of EWY, is expecting to be able to issue another strong report for quarter two.

Interestingly though, Samsung's confidence and its plans to increase production in its vital semiconductor business has caused concern about oversupply in the industry. With chips accounting for 44% of the company's first-quarter profits, Samsung plans on expanding production to meet what it sees as demand that will continue to grow.

There has been some concern about a glut forming in the industry due to oversupply. If this happens, it could weaken demand and hurt Samsung as well as other semiconductor manufacturers.

However, if demand for chips does continue to grow, Samsung's plans for expansion could help to usher in more quarters ahead of strong profit growth.

For the time being, it appears as though politics will heavily influence which way the Korea ETF will go. Korean markets are accustomed to threats from the North, but EWY will likely continue to remain flat until there is a political decision regarding the government's response to the sinking of one of its patrol boats.

The sideways movement in EWY leaves it ahead of competitors in the past month, though. EWY gained 0.3% over the period, compared to a 3.8% loss in

iShares MSCI EAFE

(EFA) - Get Report

and a 1.3% loss in

iShares MSCI All Country Asia ex-Japan

(AAXJ) - Get Report

.

iShares MSCI Japan

(EWJ) - Get Report

fell 1.7% and

iShares FTSE/Xinhua China 25

(FXI) - Get Report

declined 4.8%.

Should South Korea pursue sanctions against North Korea, and not a military escalation, EWY could see a move upward as the strength of the economy becomes less constrained in the markets by political uncertainty.

-- Written by Don Dion in Williamstown, Mass.

At the time of publication, Dion Money Management was not long any equities mentioned.

Don Dion is president and founder of

Dion Money Management

, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.