If the Strait of Hormuz Reopens, This ETF Could Soar

It's only been a couple of weeks, but the war in Iran has roiled markets.

Oil prices have spiked, and investors are contending with a new source of uncertainty as the trajectory of the war and its impact on the global economy are difficult to predict.

President Trump has promised that the war will end in weeks, but Iran may not cooperate with that goal, and the Middle Eastern country has effectively shut down the Strait of Hormuz, which is the main reason oil prices have soared.

The situation hasn't just upset the U.S. economy. Markets around the world have been shaken by the war. Arguably, nowhere has been more impacted than the Asia-Pacific region, which counts on the Persian Gulf region for most of its oil.

In fact, more than 80% of the oil and liquid natural gas (LNG) leaving through the Strait of Hormuz is going to Asia, and the bottleneck is critical for markets like Japan and South Korea.

Approximately 95% of Japan's oil and 70%-75% of South Korea's oil comes through the Strait of Hormuz, meaning the spike in prices and the supply shortage are having a significant impact on those countries. Japan and South Korea have begun releasing their strategic oil reserves and are taking other measures to ensure they have adequate energy access. Stock markets in both countries have plunged in response to the crisis in Iran. However, South Korean stocks have been hit especially hard in the wake of the war's outbreak.

Image source: Getty Images.

The South Korean juggernaut

The South Korean stock market, or Kospi, has been one of the best-performing in the world in recent years. South Korea is home to leading technology companies like Samsung and SK Hynix, top memory chipmakers that have benefited from the boom in demand for AI chips. Additionally, leading automakers and EV makers like Hyundai and Kia have driven a surge in the Korean stock market, and corporate governance reforms have boosted investor confidence in the country. Even after soaring, South Korean stocks still trade at a discount compared to their U.S. counterparts.

As a result, the Kospi has more than doubled over the last year, despite the recent pullback. Even after a rebound this week, as of Tuesday, the Kospi is down 10% from where it was before the Iran war started.

1 ETF poised to pop if oil prices fall

Few stocks have fallen as much on the Iran crisis as those in South Korea, but the dip looks like an opportunity if the Strait of Hormuz reopens in a reasonable time frame.

To get exposure to the South Korean stock market, the best way to do so i with the iShares MSCI South Korea ETF (NYSEMKT: EWY). As you can see from the chart below, the fund is down more than 10% since the war broke out, and it was down by as much as 18% at one point. The ETF has also been moving inversely to oil prices.

EWY data by YCharts

Prior to the breakout of the war, the EWY ETF had been soaring. Nearly 50% of the fund is made up of Samsung and SK Hynix, two of the three leading memory chipmakers in the world, and constraints in memory chips could persist for at least the next two or three years, given the current shortage and the surge in capital expenditures to build out AI data centers.

Nvidia just further stoked those expectations when CEO Jensen Huang said the company would bring at least $1 trillion in revenue over the next two years, a forecast that bodes well for the South Korean memory chipmakers and EWY, which trades at a price-to-earnings ratio of just 18.

The Strait of Hormuz will eventually reopen, though the timeline is uncertain, and the AI boom is poised to continue. Between those two factors and the ETF's low valuation, the EWY looks set to continue delivering superior returns.

Jeremy Bowman has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.