This Nation's Stocks Are Beating the World. Should You Invest $1,000?

South Korea's stock market is going gangbusters this year. The Korea Composite Stock Price Index, or Kospi, is up 48% year to date. For comparison, both the S&P 500 index of large-cap U.S.-listed stocks and the broader Wilshire 5000 index are up about 15% this year.

The Kospi is also outperforming the Nasdaq, the FTSE 100 (United Kingdom), the Hang Seng (Hong Kong), the Nikkei 225 (Japan), and the Taiex (Taiwan) indexes. And the iShares MSCI South Korea ETF (NYSEMKT: EWY), which tracks the performance of large and mid-cap stocks in the Korean market (analogous to the S&P 500), has climbed 64% year to date.

What's driving this recent rise of Korean stocks?

Reforms on the way

Several factors are contributing, and all look to continue for the foreseeable future.

• President Lee Jae Myung's election in June ended months of turmoil after the short-lived coup attempt last December, giving investors new confidence in the government and economic stability.
• Lee has made better corporate governance standards and improving stock market returns two of his top priorities. He has pledged to do whatever it takes to push the Kospi index past 5,000 during his term. Right now, it stands at around 3,550.
• Lee has vowed to end the so-called "Korea discount" -- which refers to the fact that Korea's listed companies have historically suffered from low valuations -- in part by passing new shareholder protections. He also wants to lower the threshold for capital gains taxes on stocks.
• There is increased interest among global investors in Korean companies this year (for the reasons stated above). Since May, overseas investors have made $11.5 billion in stock purchases, far above the historical average.
• And Korea has its own AI boom, driven by companies like Samsung Electronics and chipmaker SK Hynix.

That's why it might be wise to get in the Korean stock parade right now. And the iShares MSCI South Korea ETF is a great way to do it. The ETF holds 82 stocks. Its top five holdings are:

• Samsung Electronics, a huge electronics manufacturer (24% of the ETF)
• SK Hynix, a semiconductor manufacturer (14%)
• KB Financial Group, a bank and financial services firm (2.9%)
• Hanwha Aerospace, an aircraft engine manufacturer (2.5%)
• Naver Corp, an internet search and advertising firm (2.4%)

No company outside of the top two accounts for more than 5% of the fund, which makes it highly diversified. And the cost is very reasonable. The ETF's expense ratio, which investors pay for management and operation of the fund, is 0.59%.

To be sure, the possibility of new U.S. tariffs on South Korean goods is a threat to the country's economy and stock market. But in July, the White House announced a "full and complete trade deal" with South Korea to lower the tariff on the country's goods to 15%. That's a pretty reasonable level and -- if the U.S. abides by it -- is a tariff South Korea can live with now.

Image source: Getty Images.

Discounted stocks

Korean stocks are cheap by any measure. The trailing-12-month price-to-earnings ratio for the Kospi index is about 16.5. Compare that to the S&P 500 index, which is trading around 28 times trailing earnings.

It's been that way for a while, as corporate governance issues, capital allocation practices, and a lack of transparency about Korean companies have kept stock prices artificially low.

If President Lee keeps a stable hand on the economy and even gets close to his promise of eliminating the Korea discount, the entire market should continue to rise. Smart investors will want to get in on that now.

Matthew Benjamin has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.