The Best ETF For The U.S.-South Korea Trade Agreement?

On a weak day for the markets overall, ETFs with heavy exposure to South Korea are trading lower despite Congress finally getting to passing a free trade agreement with the Asian economic power. President Obama said the agreement is a win for both countries that could expand U.S. exports by $11 billion, according to Forbes.

Still, shares of the iShares MSCI South Korea Index Fund (NYSE: EWY), one of the largest emerging markets ETFs, and the IndexIQ South Korea Small-Cap ETF (NYSE: SKOR) are trading fractionally lower on the day.

The trade pact with South Korea alone is expected to create 70,000 new U.S. jobs. That's good news, but for investors looking to profit from the trade agreement, the answer may be a surprise.

While neither the performance of the iShares MSCI South Korea Index Fund and the IndexIQ South Korea Small-Cap ETF over the past three months is anything to brag about, SKOR has slightly outperformed its bigger large-cap rival and the only South Korea small-cap pure-play ETF on the market is poised to be the bigger winner on the back of the trade agreement news.

“As Congress holds a joint session today with South Korean president, Lee Myung-bak, investors and advisors are starting to consider what the ramifications of this trade pact may be,'' said IndexIQ CEO Adam Patti. “In our view, the agreement's elimination of some tariffs and policies, historically aimed at protecting US manufacturers, will benefit South Korean companies. Those benefits will be disproportionately felt by the smaller companies because the larger companies historically were less impacted given the many other countries to which they were able to sell their products.”

Patti added: “The agreement does include increased protections for US auto makers, but while this might negatively impact South Korean auto makers, that has no impact on SKOR holdings since SKOR holds only small caps (i.e. not the large auto makers).  As SKOR does not hold any large, multi-national companies, this is another example of why SKOR holdings stand to benefit more from the agreement than their large cap counterparts.”

SKOR allocates roughly 69% of its sector weight to industrials, consumer discretionary, technology and materials names, all sectors that could benefit from increased trade with the U.S.

SKOR made its debut in April 2010 and now has almost $11.5 million in assets under management.