Shares of the iShares MSCI South Korea Index Fund (EWY), one of the largest country-specific ETFs, are lower by 0.9 percent in midday trading after an unfavorable ruling in a patent trial against Apple (AAPL). A judge has ordered Samsung to pay California-based Apple over $1 billion in damages.
News of the verdict sent Samsung shares tumbling in Seoul trading, but the trial headlines have not hampered the iShares MSCI South Korea Index Fund to the extent that some traders may have expected.
In theory, EWY should be down more than 0.9 percent. After all, the $2.63 billion fund allocates 21.6 percent of its weight to Samsung making the conglomerate by far the fund's largest holding. Hyundai Motor is next with a weight of 6.3 percent.
Oddly enough, it is Apple perhaps more than any other stock that has shown investors the advantages and disadvantages of ETFs with excessive weights to just one or two stocks. Since most passively managed ETFs use a cap-weighting methodology, Apple's prominence in some funds has increased along with its market value.
That is not a problem when the stock in question is going up, but the flaw of excessive weights to just one or two stocks becomes exposed when those stocks slide. That is exactly what happened when Apple topped out in early April and proceeded to tumble through mid-May.
Along the way, popular ETFs such as the PowerShares QQQ (QQQ), the Technology Select Sector SPDR (XLK) and the iShares Dow Jones U.S. Technology Sector Index Fund (IYW) were punished for featuring Apple so prominently.
Other ETFs with large exposure to Samsung are also holding up fairly well. The iShares MSCI AC Asia Information Technology Index Fund (AAIT) allocates almost 17.6 percent of its weight to the South Korean firm, making it that ETF's largest holding. In the case of AAIT, it should be noted that the ETF has not traded since August 21.
With a loss of 1.3 percent, the iShares S&P Asia 50 Index Fund (AIA) is one of the worst Samsung ETF offenders. Samsung accounts for 15.4 percent of that ETF's weight, more than double the next largest holding.
In terms of why EWY and is not suffering more on the back of the Apple verdict news, perhaps it is reasonable to speculate that traders have realized Samsung is a true conglomerate, comparable to the General Electric (GE) of Asia. The company makes products ranging from washers and dryers to high-end televisions. A pure-play mobile phone company this is not.
In the essence of caution, investors would do well to wait to see if EWY finds support at $56 before taking a near-term nibble at the fund.
For more on ETFs with large weights to just one stock, click here.
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