South Korea’s 55% Market Surge Has Sparked An ETF Boom — But It’s Really An AI Chip Bet

South Korea’s stock market is on a historic run, but ETF investors piling into the rally may be making a far narrower bet than they realize.

MarketWatch, citing FactSet data, reported that the KOSPI (Korea Composite Stock Price Index) surged 31% in April, marking its second-best monthly gain on record after January 1998 during the IMF bailout. The index is up around 55% year-to-date. The benchmark even touched an all-time high intraday before closing lower on Thursday.

• iShares MSCI South Korea ETF stock is approaching key resistance levels. Why is EWY stock breaking out?

With total market capitalization climbing to $4.2 trillion, South Korea has overtaken the U.K. to become the world’s eighth-largest equity market.

For investors, much of this momentum is being accessed through ETFs like the iShares MSCI South Korea ETF (NYSE:EWY), which has jumped around 59% this year, closely tracking the broader market. The fund has also seen inflows of around $6.4 billion so far this year, per ETFDb.

But while these funds are often seen as diversified country plays, the current rally tells a different story: Korea ETFs are increasingly functioning as concentrated bets on a single theme: AI-driven demand for memory chips.

A Market Driven By Two Stocks

At the heart of the surge are semiconductor giants Samsung Electronics and SK Hynix, which dominate both the index and EWY (45% weightage). Tight supply conditions across high-end memory and traditional DRAM chips amid accelerating AI spending have been boosting the stocks for the past month.

This concentration means that investors buying Korea ETFs are not getting broad exposure to the country’s economy. Instead, they are effectively taking a high-conviction position on the global AI supply chain, specifically, the memory segment where demand is currently outstripping supply.

How Investors Can Diversify

With concentration risks rising, some investors are looking beyond Korea-focused funds to balance their portfolios. One approach is shifting into broader emerging market ETFs such as iShares MSCI Emerging Markets ETF (NYSE:EEM) or Vanguard FTSE Emerging Markets ETF (NYSE:VWO), where South Korea is just one component among several economies.

Others are rotating into developed market funds such as Vanguard FTSE Developed Markets ETF (NYSE:VEA) or iShares MSCI EAFE ETF (NYSE:EFA), which offer more balanced sector exposure. EEM and VWO have seen more than $3 billion and $4 billion in inflows this year, respectively, per ETFDb.

There is also a shift toward single-country alternatives with different growth drivers, including the iShares MSCI Japan ETF (NYSE:EWJ), which has seen almost $4 billion in inflows so far this year. Combining exposure to EWY and EWJ can be a great way to play the trends.

The goal in each case is to reduce reliance on a single theme and avoid overexposure to the semiconductor cycle.

What Comes Next For ETF Investors

The narrow leadership raises questions about how sustainable the ETF trade could be. If the memory cycle weakens or AI spending slows, the downside could be amplified given the heavy weighting of chipmakers.

At the same time, some active investors are already rotating into second-tier beneficiaries of the AI boom, including companies tied to power equipment and energy infrastructure needed to support data centers.

Structural tailwinds, such as government-led “value-up” reforms initiated in February 2024, aimed at improving corporate governance, along with strong earnings growth led by semiconductors and improving currency dynamics, continue to support the broader market.

But for ETF investors, South Korea’s rally may look broad on the surface, yet for now, it remains tightly linked to one of the market’s most crowded and powerful trades.