The iShares MSCI South Korea ETF (NYSE:EWY) has done well this year, helped by the ongoing surge of Samsung and SK Hynix. It has jumped by 87% this year, beating other popular US funds such as those tracking the Nasdaq 100 Index. However, there is a risk that the fund may be about to reverse in the near term.

EWY ETF is Facing Some Major Risks

South Korean stocks have soared this year, helped by the ongoing artificial intelligence boom that has pushed its top stocks like Samsung and SK Hynix to their record highs. 

This growth has led to more demand for these stocks from South Korean and American investors. Data shows that the EWY ETF has added over $5.6 billion in assets in the last 12 months. This increase has brought its total assets to over $23 billion.

However, the fund is facing some major risks. The first one is that Samsung and SK Hynix have an outsized influence in its composition. SK Hynix, the biggest maker of memory chips, accounts for 28.40% of the fund, while Samsung accounts for 23.7%. SK Square, which is a major SK Hynix investor, accounts 4.54% of the fund. 

These three companies account for 56.7% of the fund, which explains why it has jumped sharply in the last 12 months. The risk, however, is that the fund will go through a reversal when the three stocks retreats. This is what happened on Friday, when it dropped by 3.77% following Samsung’s and SK Hynix’s reversals.

Another key risk is that the ongoing South Korean stock market rally has been largely fueled by retail investors, many of whom appear to be driven by fear of missing out (FOMO). Data shows that retail investment in the KOSPI has surged to $51.8 billion this year, while margin debt has jumped 71% to more than $12 billion.

Historically, such periods of market euphoria have often been followed by sharp reversals as speculative sentiment fades. That risk helps explain why many foreign investors have continued to reduce their exposure to South Korean equities despite the market’s strong rally.

EWY Stock Has Formed Risky Patterns

The EWY ETF stock has formed a double-top pattern at $217 and a neckline at $174.60, its lowest level on June 5. 

At the same time, the MACD indicator suggests that it has formed a bearish divergence pattern. This pattern happens when the two lines of the indicator are falling. In this case, they formed a bearish crossover and are pointing downwards.

Therefore, there is a risk that the stock will drop further in the near term. If this happens, it will fall to the neckline at $174.60. More downside will be confirmed if this happens. 

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