South Korea is home to some of the largest global players in technology and heavy industry. Some are familiar names such as Samsung Electronics Co., Ltd. (SSNLF) while others such as POSCO (PKX), the world's largest steel maker, make fewer headlines but are no less important to the global economy. The nation of 50 million is the fourth-largest economy in Asia, behind China, Japan, and India.

Focus on EWY

On that basis it can be an attractive target for investors who want to do specific country plays, though such strategies tend to be niche, according to Morningstar, Inc. (MORN) Senior Analyst Patricia Oey. There is only one ETF of any size that focuses on South Korea: the iShares MSCI South Korea Capped (EWY), with 4.7 billion under management. The others are quite small, and as such, can be volatile. Some are even in danger of being discontinued.

Oey noted that because exports are such a huge part of the South Korean economy, the stock indices there tend to follow global trends. That can be seen in their year-to-date performance. Over the last five years, the returns of the South Korea ETFs don't really start to diverge from the U.S. indices until the beginning of 2013, and even then they track the FTSE fairly closely. Looking at the year-to-date numbers (to Sept. 5) shows a roughly similar pattern, with the U.S. markets bringing in 8.61% on the NASDAQ and 9.73% from the S&P, while EWY only hit the 0.63% mark and the FTSE returned a similarly anemic 1.57%.

EWY's Components

So what's in EWY? Its top holdings are Samsung Electronics Co. Ltd., Hyundai Motor Co., SK Hynix Inc., POSCO and Shinhan Financial Group (SHG). Of those, only Shinhan is focused on the Korean market (it's a consumer bank). Samsung, SK Hynix, Hyundai and POSCO are all export-oriented, given that the first two are in technology, Hyundai is in autos, and POSCO is a steel producer. You'll notice that many of those companies lack tickers; that's because they trade on the Korea Exchange (KRX) and not on a U.S exchange (the tickers listed are for American depositary receipts (ADR). (For more, see: How to Invest in Samsung.)

If one wants small-cap Korean companies, the First Trust South Korea AlphaDEX Fund (FKO) is one place to look, though the ETF itself is tiny. It tracks the S&P South Korea BMI, an index that consists of companies domiciled in emerging markets. The fund itself is quite small, only about $4 million. Its top five holdings (as of June 30) are SK Hynix Inc., LG Display Co., Ltd. (LPL), Kia Motors Corp., KT Corp. (KT), and Amorepacific Corp. Year-to-date, the performance has been about 2.59%, little better than its larger cousin, though its calendar year performance has been much better at 16%. (For more, see: 3 Asia ETFs for your Portfolio.)

Still Emerging

Oey noted that South Korea is often seen as a developed nation, but from an investment perspective, it still has many of the hallmarks of an emerging market. In fact, in June MCSI didn't upgrade the country to developed market status, citing the limited offshore convertibility of its currency, the won. (For more, see: What is an Emerging Market Economy?)

The other issue is that strong as the Korean economy has been, with low unemployment and being home to some very profitable individual companies, there are some hallmarks of an emerging market still there. For example, while some big companies are traded publicly, there's still a lack of transparency, Oey said, and shares are often exchanged between families or branches of the same family. On issues such as treatment of minority shareholders South Korean companies will look more like their Brazilian or Russian counterparts. (For related reading, see: Why These 3 Countries Could Be Too Risky to Invest In.)

Slow to Grow Domestically

Another factor is what kind of economy it is. South Korea as made gigantic strides in the last 30 years. Korean automobiles went from being the butt of jokes to serious contenders, for example, and Samsung Electronics has displaced Nokia as the world's largest handset maker. At the same time, it's still an export-oriented economy, not unlike China. Building a domestic market has proven a slow process.

One drag on domestic demand is home prices. One wouldn't think so, but the debt-to-income ratio in Korea is as high or higher than that of the U.S., primarily because real estate is so expensive. On top of that, Korea is facing a demographic problem as acute as that of China or Japan, with an aging population and a slowing birth rate. Those factors could offset the growth that the Korean government is hoping for with more people becoming consumers. (For more, see: China ETFs: Get in as China Matures.)

The Bottom Line

Invest in Korea if you know the country well or believe in the growth story behind some of their tech and industry giants, but beware of demographical and transparency issues. Your best bet for accessing hard-to-reach Korean companies remains the EWY ETF. (For related reading, see: Why You Need More International Stocks.)