South Korea and its related exchange traded fund (ETF) are constrained by an over-regulated financial sector.

This may be causing the iShares MSCI South Korea (EWY) ETF to have a trading pattern that looks a lot like Japan’s, reports Carl Delfeld for Forbes. The ETF’s top three holdings are Samsung, Posco and Kookmin Bank. They are facing many obstacles, and make up for 30% of the fund’s holdings.

But last year, the "Capital Markets Integration Act" came into effect and could be a start for a reform. South Korea’s banking sector was liberalized a decade ago. However, many financial markets are off-limits to foreign institutions. In an effort to become more of a regional financial services hub, legislation is aimed at keeping up with competitors, as outlined in the act.

The biggest change in the act will be in full force by January 2009: financial groups may do anything that is not expressly prohibited. Some have been comparing the changes to London’s "big bang" 20 years ago, in which the complete structure of the market was altered because of rules changes.

Tags: Asia, Europe, Sector ETFs, South Korea, UNG, United Kingdom