Korean Stocks Surge 92% While Trading at Half S&P 500's Valuation—Here's Why Investors Are Taking Notice

If you missed the South Korea market’s explosive rally last year, you weren’t alone. The iShares MSCI South Korea ETF (EWY) delivered a stunning 92% return during 2025, substantially outpacing broader U.S. indices and capturing the attention of diversification-focused portfolio managers. As of late January 2026, the fund has extended its momentum with an additional 19% gain, suggesting the current environment remains supportive for Korean equities.

What makes this surge particularly compelling is the valuation story. The Korean market currently trades at a price-to-earnings ratio of 17—a significant discount to the S&P 500’s 28. Looking at forward earnings, the advantage becomes even more pronounced, with Korean stocks valued at approximately 10 times forward estimates. This combination of strong momentum and attractive valuations has positioned the iShares South Korea ETF as a notable alternative for investors seeking exposure beyond traditional U.S.-focused holdings.

The Foundation: Why South Korean Markets Are Rallying

Several converging forces have driven South Korea’s outperformance. The primary catalyst has been the artificial intelligence boom, which has created unprecedented demand for semiconductor capacity. South Korea’s two dominant memory chipmakers—Samsung and SK Hynix—have been direct beneficiaries of this trend. Both companies experienced breakout years as memory prices surged alongside global AI infrastructure investment.

Beyond semiconductor demand, a favorable exchange rate environment has supported Korean exporters. The weakness in the Korean won relative to the U.S. dollar makes Korean products more competitive in international markets, providing a tailwind for the nation’s export-dependent economy.

Policy tailwinds have also emerged as a supporting factor. Under the current administration, initiatives to improve corporate governance and enhance shareholder returns have gained traction. Notably, dividend tax rates have been reduced from 50% to 30%, and there’s momentum building around inheritance tax reform—both measures expected to support equity valuations. This represents a structural shift toward shareholder-friendly corporate policies that could sustain valuations at higher levels.

Understanding the Portfolio: Core Holdings and Diversification

Samsung and SK Hynix remain the dominant forces within the EWY, collectively representing 45% of the fund’s assets—Samsung at 26.8% and SK Hynix at 18.3%. This concentration provides significant leverage to memory chip cycles and AI-driven semiconductor demand.

However, the fund extends well beyond semiconductors. Hyundai Motor has emerged as a leading electric vehicle producer and holds an 80% stake in Boston Dynamics, a robotics firm that some analysts believe is advancing humanoid technology ahead of competing efforts. The portfolio also includes Kia, positioned as a fast-growing Korean auto manufacturer, and Hanwha Aerospace, a major supplier to global aerospace leaders including GE and Rolls-Royce.

Additionally, Naver—often described as the Korean equivalent of search-driven internet platforms—brings exposure to digital services and online infrastructure. This diversity suggests the fund captures multiple growth vectors, rather than relying solely on semiconductor performance.

Evaluating the Investment Case: Opportunity and Risk

The EWY presents a compelling value proposition for investors reconsidering their geographic allocation. With valuations roughly half those of the S&P 500 and exposure to secular growth themes like AI infrastructure, the fund offers meaningful diversification benefits. Performance data from 2025 reinforces this advantage—the iShares MSCI World ETF delivered a 21% return, demonstrating that international diversification would have proved beneficial for portfolio construction.

However, investors should recognize that memory chip markets have historically demonstrated significant cyclical volatility. The EWY’s substantial allocation to Samsung and SK Hynix means the fund inherits this sector risk. While current AI-driven demand appears robust, memory chip cycles can shift rapidly.

Despite these cyclical considerations, the secular backdrop remains supportive. As long as artificial intelligence infrastructure spending remains elevated—a reasonable assumption given early-stage AI deployment globally—Korean memory producers should continue benefiting from strong demand dynamics.

For investors seeking to reduce U.S. equity concentration at a time when S&P 500 valuations approach historical highs, adding Korean exposure through the EWY appears strategically prudent. The combination of reasonable valuation, structural policy support, and secular technology tailwinds creates a reasonable foundation for a meaningful position, particularly for those comfortable with the inherent volatility of semiconductor-heavy portfolios.